Straddles: A straddle consists of the simultaneous purchase (a long straddle) or sale (a short straddle) of a call and a put on the same underlying security with the same strike price and expiration date. Below you see a quote screen for a Straddle. As a Buyer of a Straddle with a $45 Strike, we would pay $4.65. As the seller, we would receive $4.35. In this example, the quote is two days before Options Expiration so trading is volatile.
As a buyer, if the stock drops significantly from $45, we will gain from the $45 put we purchased. If the stock rises significantly from $45, we will gain from the $45 call we purchased. The farther the stock deviates from $45, the more money we can make. Since our cost is $4.65, in order to have any profit, the stock price would either have to rise above $49.65 or drop below $40.35. Otherwise we will have a net loss on the position. The worst thing that could happen, as a buyer, is if the stock closed at $45.00. The buyer of a straddle is hoping for huge volatility in the stock price.
As a seller of a straddle, the best trade for us is if the stock closed at $45.00 exactly. This way, neither the call nor the put option is exercised. Any deviation from the Strike Price and at least one of the options will be exercised. Our ideal range would be for the stock to trade between $40.65 and $49.35. At either end, we would break even on the trade. Anything in between and we will have a profit. The seller of a straddle is hoping for less volatility in the stock price.
