In finance, a straddle is an investment strategy involving the purchase or sale of particular option derivatives that allows the holder to profit based on how much the price of the underlying security moves, regardless of the direction of price movement. The purchase of particular option derivatives is known as a long straddle, while the sale of the option derivatives is known as a short straddle. The field of finance refers to the concepts of time, money and risk and how they are interelated. ... An investment strategy is a set of guidlines, behaviors or procedures designed to maximize overall return for an individuals investment portfolio. ... This article is about options traded in financial markets. ... Derivatives traders at the Chicago Board of Trade. ... In finance, an underlying is an investment from which a derivative security is derived. ...

Long straddle

An option payoff diagram for a long straddle position

A long straddle involves going long, purchasing, both a call option and a put option on some stock, interest rate, index or other underlying. The two options are bought at the same strike price and expire at the same time. The owner of a long straddle makes a profit if the underlying price moves a long way from the strike price, either above or below. Thus, an investor may take a long straddle position if he thinks the market is highly volatile, but does not know in which direction it is going to move. This position is a limited risk, since the most a purchaser may lose is the cost of both options. At the same time, there is unlimited profit potential, since the change of the underlying price of any option is unlimited.^[1] This article is about financial options. ... A put option (sometimes simply called a put) is a financial contract between two parties, the buyer and the writer of the option. ... For other uses, see Stock (disambiguation). ... An interest rate is the price a borrower pays for the use of money he does not own, and the return a lender receives for deferring his consumption, by lending to the borrower. ... In economics and finance an index (for example a price index, a stockmarket index) is a benchmark of activity, performance or any evolution in general. ... In finance, an underlying is an investment from which a derivative security is derived. ... The strike price, or exercise price, is a key variable in a derivatives contract between two parties. ... Volatility most frequently refers to the standard deviation of the change in value of a financial instrument with a specific time horizon. ...

For example, company XYZ is set to release its quarterly financial results in two weeks. A trader believes that the release of these results will cause a large movement in the price of XYZ's stock, but does not know whether the price will go up or down. He can enter into a long straddle, where he gets a profit no matter which way the price of XYZ stock moves, if the price changes enough either way. If the price goes up enough, he uses the call option and ignores the put option. If the price goes down, he uses the put option and ignores the call option. If the price does not change enough, he loses. This article is about financial options. ... A put option (sometimes simply called a put) is a financial contract between two parties, the buyer and the writer of the option. ... A put option (sometimes simply called a put) is a financial contract between two parties, the buyer and the writer of the option. ... This article is about financial options. ...

Short straddle

An option payoff diagram for a short straddle position

A short straddle is a non-directional options trading strategy that involves simultaneously selling a put and a call of the same underlying security, strike price and expiration date. The profit is limited to the premiums of the put and call, but it is risky if the underlying security's price goes up or down much. The deal breaks even if the intrinsic value of the put or the call equals the sum of the premiums of the put and call. This strategy is called "nondirectional" because the short straddle profits when the underlying security changes little in price before the expiration of the straddle. The short straddle can also be classified as a credit spread because the sale of the short straddle results in a credit of the premiums of the put and call. Image File history File links Shortstraddle. ... Image File history File links Shortstraddle. ... The introduction to this article provides insufficient context for those unfamiliar with the subject matter. ...

A short straddle position is highly risky, because the potential loss is unlimited, whereas profitability is limited to the premium gained by the initial sale of the options.

The collar

The Collar is a more conservative "opposite" that limits gains and losses. A collar is an investment strategy that uses options to limit the possible range of positive or negative returns on an investment in an underlying asset to a specific range. ...

As a volatility strategy

By engaging in a straddle transaction, the investor is also taking a position on the volatility of the underlying security. Going long a straddle is a bet that the underlier will be more volatile over the straddle's term than predicted by the market. Conversely, going short a straddle is a bet that the underlier will be less volatile. To see this, assume that the investor frequently re-hedges his portfolio with the underlier to keep his portfolio delta neutral. Because delta for an option is a monotonically increasing function of the underlier's price, one can quickly see that large underlier movements help the investor who is long a straddle. When the underlier's price goes up, the total delta of the straddle goes up as well, and the investor will need to sell the underlier to maintain a delta neutral portfolio. When the underlier goes down, the investor will need to buy the underlier. Hence, lots of movement in the underlier, or volatility, causes the investor to gain from his hedging transactions - he will always need to buy when the underlier is low and sell when high. In the same way, an investor with a short straddle will face the opposite situation - he will have to buy high and sell low when the underlier's price is moving. For investors with a view on the future volatility of a particular underlier, a straddle (or, for that matter, any option in general) can be a way to implement that view. Recently, the development of variance swaps allows investors to trade volatility directly without the need for constant delta hedging. For a further discussion of this style of investing, see volatility arbitrage. Volatility most frequently refers to the standard deviation of the change in value of a financial instrument with a specific time horizon. ... In finance, a portfolio containing options is delta neutral when it consists of positions with offsetting positive and negative deltas (exposure to changes in the value of the underlying instrument), and these balance out to bring the net delta of the portfolio to zero. ... The Greeks redirects here. ... A variance swap is a financial derivative whose payoff is the realised volatility squared of the underlier based on a prespecified set of sampling points. ... Volatility arbitrage, a. ...

Strangles

A strangle is an options strategy similar to a straddle, but with different strike prices on the call and put options. This is used to bias the profitability of the strategy towards one particular direction of price movement in the underlying, while still offering some (reduced) protection against a movement in the other direction. In finance, a strangle is an investment strategy involving the purchase or sale of particular option derivatives that allows the holder to profit based on how much the price of the underlying security moves, with relatively minimal exposure to the direction of price movement. ... The strike price, or exercise price, is a key variable in a derivatives contract between two parties. ...

For example, the trader in the example above might enter into a strangle if he believes that XYZ's financial statement will probably be positive, but he is not certain and still wants to hedge some of the risk of a negative statement (and is willing to pay for this privilege.)

Nick Leeson and the Barings Bank collapse

Nick Leeson took short straddle positions when chasing losses he had run up for his employer, Barings Bank. He had initially invested in futures on the Nikkei 225 stock index. Following a dramatic fall in the market, largely due to the Kobe earthquake, Leeson lost millions. He tried to re-coup these losses by investing in the higher risk, but potentially more rewarding, straddles. He bet that the Nikkei would stabilise and stay in a range around 19,000. His bet failed and losses escalated to $1.4bn, causing the bankruptcy of Barings. Nicholas Leeson (English, born February 25, 1967) is a former derivatives trader whose unsupervised speculative trading caused the collapse of Barings Bank, the United Kingdoms oldest investment bank. ... Barings Bank (1762 to 1995) was the oldest merchant banking company in London, England [1] until its collapse in 1995 after one of the banks employees, Nick Leeson, lost $1. ... In finance, a futures contract is a standardized contract, traded on a futures exchange, to buy or sell a certain underlying instrument at a certain date in the future, at a specified price. ... Nikkei 225 (日経平均株価, 日経225) is a stock market index for the Tokyo Stock Exchange (TSE). ... Categories: Japan-related stubs | 1995 | Earthquakes | Japanese history ... Notice of closure stuck on the door of a computer store the day after its parent company, Granville Technology Group Ltd, declared bankruptcy (strictly, put into administration—see text) in the United Kingdom. ...

References

General

• McMillan, Lawrence G. (2002). Options as a Strategic Investment, 4th ed., New York : New York Institute of Finance. ISBN 978-0-7352-0197-2. 

Specific

External links

• Straddle Tutorial, OptionTradingpedia.com
• Options Calculator/Simulator of Straddle Strategy