The Basic Long Straddle
The long straddle is an option strategy to use when a trader is looking for a
big move in a stock but is uncertain which direction it will move.
Technically, the Commodity Channel Index (CCI), Bollinger bands, or
pennants are some examples of indicators which might signal the possibility
of a breakout. Or fundamental data might call for a revaluation of the stock
based on an impending catalyst. In either case, a long straddle, is a way for
traders to position themselves for the expected move, without regard to
direction. In this example, we’ll study a hypothetical $70 stock poised for a
breakout. We’ll buy the one-month 70 straddle for 4.25.
Exhibit 15.1 shows the payout of the straddle at expiration.
EXHIBIT 15.1 At-expiration diagram for a long straddle.
At expiration, with the stock at $70, neither the call nor the put is in-the-
money. The straddle expires worthless, leaving a loss of 4.25 in its wake
from erosion. If, however, the stock is above or below $70, either the call or
the put will have at least some value. The farther the stock price moves