Long Straddle (Buy Straddle) Option Trading Strategy Explained

Published on Thursday, April 19, 2018 | Modified on Wednesday, June 5, 2019

Long Straddle (Buy Straddle) Options Strategy

Strategy Level	Beginners
Instruments Traded	Call + Put
Number of Positions	2
Market View	Neutral
Risk Profile	Limited
Reward Profile	Unlimited
Breakeven Point	2 break-even points

The Long Straddle (or Buy Straddle) is a neutral strategy. This strategy involves simultaneously buying a call and a put option of the same underlying asset, same strike price and same expire date.

A Long Straddle strategy is used in case of highly volatile market scenarios wherein you expect a big movement in the price of the underlying but are not sure of the direction. Such scenarios arise when company declare results, budget, war-like situation etc.

This is an unlimited profit and limited risk strategy. The profit earns in this strategy is unlimited. Higher volatility results in higher profits. The maximum loss is limited to the net premium paid. The max loss occurs when underlying asset price on expire remains at the strike price.

The usual Long Straddle Strategy looks like as below for NIFTY current index value at 10400 (NIFTY Spot Price):

Suppose Nifty is currently at 10400 and due to some upcoming events you expect the price to move sharply but are unsure about the direction. In such a scenario, you can execute long strangle strategy by buying Nifty Put at 10400 and buying Nifty Call at 10400. The net premium paid will be your maximum loss while the profit will depend on how high or low the index moves.

When to use Long Straddle (Buy Straddle) strategy?

The strategy is perfect to use when there is market volatility expected due to results, elections, budget, policy change, war etc.

Example

Example 1 - Stock Options:

Let's take a simple example of a stock trading at Rs 40 (spot price) in June. The option contracts for this stock are available at the premium of:

• July 40 Put - Rs 2
• July 40 Call - Rs 2

Lot size: 100 shares in 1 lot

1. Buy 'July 40 Put': 100*1 = 200
2. Buy 'July 40 Call': 100*1 = 200

Net Debit: Rs 200 + Rs 200 = Rs 400

Now let's discuss the possible scenarios:

Scenario 1: Stock price remains unchanged at Rs 40

• July 40 Put - Expires worthless
• July 40 Call - Expires worthless
• Net Debit was Rs 400 initially paid to take the position.
• Total Loss = Rs 400

The total loss of Rs 400 is also the maximum loss in this strategy.

Scenario 2: Stock price goes above Rs 50

• July 40 Put - Expires worthless
• July 40 Call Expires in-the-money with an intrinsic value of (50-40)*100 = Rs 1000
• Net Debit was Rs 400 initially paid to take the position.
• Total Profit = Rs 1000 - Rs 400 = Rs 600

Scenario 3: Stock price goes down to Rs 30

• July 40 Put Expires in-the-money with an intrinsic value of (40-30)*100 = Rs 1000
• July 40 Call - Expires worthless
• Net Debit was Rs 400 initially paid to take the position.
• Total Profit = Rs 1000 - Rs 400 = Rs 600

Example 2 - Bank Nifty

Market View - Neutral

When you are not sure on the direction the underlying would move but are expecting the rise in its volatility.

Actions

• Buy Call Option
• Buy Put Option

Breakeven Point

2 break-even points

A straddle has two break-even points.

Lower Breakeven = Strike Price of Put - Net Premium

Upper breakeven = Strike Price of Call + Net Premium

How to exit?

• Sell the Call Options
• Sell the Put Options

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