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