Series 7: 5.3.1 Straddles

5.3.1  Straddles

A straddle is the purchase or sale of both a call and a put on the same stock, at the same strike price, and with the same expiration date. The purchase of a call and put at the same strike price is called a long straddle. The sale of both a call and put at the identical strike is called a short straddle.

Investors tend to buy or sell straddles based on their expectations about the volatility of an underlying stock. You might buy a straddle, for example, if you expect an underlying stock price to be especially volatile. Perhaps a company is introducing a new technology that may result in either a significant breakthrough or a spectacular failure. Or suppose a company is going through some executive turmoil whose resolution or continuation may have a dramatic effect on the company’s performance. Traders also purchase long straddles before earnings reports come out, when they expect the released earnings to influence the price of the stock but are unclear in which direction. If you believe a stock will fluctuate wildly in the near term but are unsure of its direction, you may be