Straddle strategy


A straddle strategy is a financial options strategy that is used to take advantage of a strong movement in an asset, even if it is not known in which direction the movement will be. Losses are made if the price of the underlying asset remains constant.

To apply this strategy, it is necessary to buy a purchase option (call) and a sale option (put) with the same exercise price on that asset. As we can see in the graph, the cost of the straddle is limited to the sum of the call and put premiums. Instead, the benefits can be unlimited by the call if the price of the underlying rises and limited by the put until the price of the underlying reaches zero.

A straddle strategy can also be done in reverse, that is, do a short straddle. It would consist of selling a call and a put with the same price. We would carry out this strategy when we expect the price of an underlying to remain constant for a time, since our profit would be the sum of the premiums, but the losses can become unlimited if the underlying changes in price.

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