It is possible to operate with options in several ways, but in this article we will explain the Straddle strategy that consists in executing two orders at the same time: a Call option and a Put option.
The short straddle strategy is characterized by being a neutral strategy that bets on price stability. To create this position, the investor sells a call option and a put option with the same exercise price and expiration date. Therefore, when making the short straddle, the investor receives the amount of both premiums.
Market expectation: the investor of this strategy expects that there will be no movement in the market, that is, when stability is expected. In addition to stability, the market in which it is operating has a relatively high implicit volatility.
Profit: the maximum profit an investor can obtain from this position is limited to the sum of the two premiums received. At maturity (expiration date), there is a profit as long as the underlying is not above the strike price of the call sold plus the amount of premiums or below the strike price of the put sold minus the total of what is received in premiums; and this profit will be maximum if the underlying is exactly at the strike price of the options sold.
Loss: The losses caused by this strategy are unlimited at the time the price of the underlying is at the extremes of the short. More specifically, the investor will make a loss when the price of the underlying is below the strike price minus the sum of the two premiums, or the price is above the strike price plus the sum of the two premiums.
Effect of time: the short straddle strategy allows the investor to take advantage of time, since when being sold options the passage of time acts in a positive way for our position.
Characteristics: it is a strategy in which the investor expects stability in the market, but as a counterpart does not know what is the maximum risk to assume, and therefore the maximum loss.
In any case, the investor of the short straddle strategy is interested in carrying out this strategy with high premiums so that the price range that leads to profits is as wide as possible.
The Long straddle strategy is a strategy that is carried out in the face of expectations of increased volatility in the future and sudden changes in price being irrelevant the direction that the market will take.
It is created by simultaneous purchase of a call option and a put option with the same exercise price and expiration date (validity). Therefore, when the Long Straddle is executed, premiums are paid, giving place to the success of the strategy in which the price has the swing and distance enough to compensate the premiums paid at the beginning.
Market expectation: The long straddle strategy is characterized by a two-way movement, since the market expectations are two-way, that is, both upward and downward.
Profit: The maximum profit that an investor can obtain by taking this position is unlimited, and should occur at the extremes of the figure. Over time, the investor will make a profit if the price of the underlying is lower than the strike price minus the premiums paid or higher than the strike price plus the premiums paid.
Loss: the maximum loss is limited to the amount paid for the premiums, and can never be greater than the total premium paid for call and put options. This will take place if the price of the underlying has not changed on the expiration date.
Effect of Time: In the long straddle strategy, the passage of time has a negative effect, since as maturity approaches, the premium paid will lose value.
Characteristics: This is a position where sudden movements in the value of the underlying are expected but the direction is unknown, therefore, and the investor knows the maximum risk assumed from the beginning. The most convenient thing to do in preparing this strategy is to have the lowest possible market volatility at the time of its opening.