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- What is an Option Contract?
- Long Call Option Strategy
- Long Put Option Strategy
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- Short Put Option Strategy
- Covered Call Option Strategy
- Long Straddle Option Strategy
- Collar Option Strategy
- Bull Call Spread Option Strategy
- Bull Put Spread Option Strategy
- Bear Call Spread Option Strategy
- Bear Put Spread Option Strategy
- Long Strangle Option Strategy
- Short Strangle Option Strategy
- Calendar Spread Option Strategy
- Butterfly Spread Option Strategy
- Cash Secured Put Option Strategy
- Option Greek Theta (Time Decay)
- Option Greek Delta (Price Relationship)
- Option Greek Vega (Implied Volatility)
- Stock option learning games
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Long straddle stock option trading strategy
What is a long straddle?
The long straddle option trading strategy is a option position that may be implemented when you think there may be a rise or fall in the price of the underlying security. But you are not sure which direction.
Straddle buying is a very popular neutral option trading strategy and should only be considered when fair consideration has been given to proper risk management.
One of the many benefits of purchasing a long straddle option position is with regard to the fact that you can participate in large moves to the upside, as well as downside with limited capital outlay.
You can essentially participate in the upward move of the stock without placing any cap on your potential for profits and without ever actually taking ownership of the underlying shares.
This can also be said for the downside. You can participate in the decline in the underlying stock without ever having to initiate a short stock position.
When going "long"(buying) call and Put options, always consider the fact that time decay has a negative impact on both long options premium. Every day that passes by futher erodes the time (measured through theta) portion of the options price.
Also keep in mind that any rise in implied volatility (IV) will have a positive impact on both the long call option and long Put option contracts. When buying a Long Straddle option position you are considered long volatility. (Implied Volatility is measured through Vega).
(Theta and Vega are very important regarding
The chart above is an illustration of the following example. Notice how the position has two break-even points--
~Buy 1 40 strike Put option contract @ $5.00 ask.
~Buy 1 40 strike Call option contract @ $5.00 ask.
~Total cost excluding commission= $1,000.
~Strike price= $40.00
~Breakeven points at expiration=
strike price ($40.00)+
total price paid ($10.00)=
upside breakeven = $50.00
------------------------------------
strike price ($40.00)-
total price paid ($10.00)=
downside break-even= $30.00
This example illustrates in which a trader or investor would hold their Long Straddle option position through the contracts expiration cycle. Remember, at expiration, all that is left in an call options premium is the intrinsic value of the said option contract.
In the case above, the total price paid for both option contracts is $10.00.
($10.00x100=$1,000 total cost). Since the stocks strike price is $40.00, you break-even when the stock is at $30.00 and $50.00 ant expiration. Anything above those two price points is all profit.
As an option buyer you have the right to exit the position at any time prior to expiration. Many traders chose to take this route. Especially when there is still a lot of time premium (theta) remaining in the options price.
Also notice how your maximum loss on the trade is limited to the price paid for the Put and Call option contracts, while there is unlimited upside potential.Also notice how your profits are capped to $3,000 on the downside. This is because while the stock could in theory, increase indefinitely. The stock can potentially only go to $0 on the downside, Therefore, $3,000 is the most money you could make on the downside after subtracting the net debit paid for the position.
There will always be trade-offs to make, so to speak. The Long Straddle option strategy allows much opportunity through leverage. This is a double edge sword. Through Proper risk management, knowing the reasons why you entered the trade, as well as your exit strategy, combined with the ability to make the necessary adjustments, one will be well on their way to trading the Long Straddle option strategy profitably.
