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    Buy Straddle

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    AKSHAYA AKSHAYA
    A long straddle involves buying both a call and put option on the same underlying asset with the same strike price and expiration date. This strategy profits if the underlying asset experiences significant volatility, moving substantially in either direction. The maximum loss is limited to the premiums paid to enter the position. A long straddle is considered a neutral, non-directional strategy that benefits from increased volatility rather than a specific directional movement in the underlying.

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    Buy Straddle

    Uploaded by

    AKSHAYA AKSHAYA
    8 views2 pages
    A long straddle involves buying both a call and put option on the same underlying asset with the same strike price and expiration date. This strategy profits if the underlying asset experiences significant volatility, moving substantially in either direction. The maximum loss is limited to the premiums paid to enter the position. A long straddle is considered a neutral, non-directional strategy that benefits from increased volatility rather than a specific directional movement in the underlying.

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    A long straddle involves buying both a call and put option on the same underlying asset with the same strike price and expiration date. This strategy profits if the underlying asset experiences significant volatility, moving substantially in either direction. The maximum loss is limited to the premiums paid to enter the position. A long straddle is considered a neutral, non-directional strategy that benefits from increased volatility rather than a specific directional movement in the underlying.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    8 views2 pages

    Buy Straddle

    Uploaded by

    AKSHAYA AKSHAYA
    A long straddle involves buying both a call and put option on the same underlying asset with the same strike price and expiration date. This strategy profits if the underlying asset experiences significant volatility, moving substantially in either direction. The maximum loss is limited to the premiums paid to enter the position. A long straddle is considered a neutral, non-directional strategy that benefits from increased volatility rather than a specific directional movement in the underlying.

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    Buy Straddle

    Buy or Long Straddle is considered as a non-directional strategy and is used when the underlying is expected to
    show large movements in either direction i.e. Upside or Downside.

    This strategy involves Buying a Call as well as Put on the same underlying for the same maturity and Strike
    Price. This strategy gives the investor an advantage of a movement in either direction — a soaring or
    plummeting value of the underlying.

    Profits can be made in either direction if the underlying shows volatility to cover the cost of the trade. Loss is
    limited to the premium paid in buying the options.

    All that the investor is looking out for, is the underlying to break out exponentially in either direction.

    Investor View: Neutral direction but expecting significant volatility in underlying movement.

    Risk: Limited to the premium paid.

    Reward: Unlimited.

    Lower Breakeven: Strike Price - net premium paid.

    Higher Breakeven: Strike Price + net premium paid.

    Illustration

    Eg. Nifty is currently trading @ 5500. Long Straddle can be created by Buying Call and Put Option for Strike
    5500 having premium of 65 and 35 respectively. Net outflow of premium is 100.

    Strategy Stock/Index Type Strike Premium


    Outflow
    Buy NIFTY(Lot size Buy 5500 65
    Straddle 50) CALL

    Buy 5500 35
    PUT

    The Payoff Schedule and Chart for the above is below.

    Page 6
    Payoff Schedule Payoff Chart
    NIFTY @ Expiry Net Payoff ( )
    4900 20000 12000
    5000 15000 10000
    5100 10000 8000
    5200 5000 6000
    5300 0 4000
    5400 -5000 2000
    5500 0 0
    5600 5000 -2000 5100 5200 5300 5400 5500 5600 5700
    5700 10000 -4000
    5800 15000 -6000
    5900 20000

    In the above chart, the breakeven happens the moment Nifty crosses 5300 or 5500 and risk is limited to a
    maximum of 5000 (calculated as Lot size * Premium Paid).Here it is important to note that the premium is
    calculated as the sum of premium paid for the Call and Put option.

    Disclaimer

    Page 7

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