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