A straddle whereby an investor simultaneously buys two options (a call and a put) on the same stock, index, interest rate, or any other underlying, for the same strike price. A long straddle (combination of a long call and a long put) is instrumental when an investor expects the market is about to move in either direction, but he is not sure which way. It follows, therefore, that a straddle buyer is typically bullish on volatility but uncertain of market direction. Therefore, it is favorable to buy straddles when the market is expected to make a significant move before expiration. The maximum loss an investor may incur from a long straddle is limited to the total premiums paid for both options. But the maximum gain is unlimited as the underlying moves in either direction.
April 27, 2023
