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Long Straddles...
Option Straddles - Long Straddles

Long Straddle Profit Loss Graph

The long straddle position is when an investor purchases the same number of call and put options at the same strike price with the same expiration date. In this way, an investor can take advantage of any sudden movement in the stock price regardless of direction. This long straddle option strategy might be employed before earnings or FDA approval notice is about to be in the news. The investor expects the stock price to react to the news, but depending on the news event, the direction of the move is unknown.

Since the investor is buying options there is a net debit to enter the trade. The maximum risk in the position is equal to the net debit. By purchasing both a call and a put, there are both upper and lower break even points. A profit is realized on the position if the stock rises above the upper break even (possible unlimited profit potential) or below the lower break even (limited from the lower break even point to zero).

Some investors also use a straddle play to take advantage of deflated option prices and low volatility. If both options are purchased at a discount, the investor assumes that volatility will rise to normal levels and theoretically, the price of both options may increase regardless of the stock price movement.
Long Option Straddles Buy calls at a set strike price and expiration date.
Long Straddle Option Buy the same number of puts at the same strike price and expiration date.
Long Option Straddles The net investment is the net debit (total premiums paid).
Long Straddle Option The maximum risk is equal to the net debit (total premiums paid).
Long Option Straddles The position has both an upper break even and a lower break even.
Long Straddle Option Long Straddle Option Strategy Profit is realized if the stock goes above the upper break even or below the lower break even.
Calculations for Long Straddles are:
Upper Break Even = Strike Price + Net Debit
Lower Break Even = Strike Price - Net Debit
Probability Sum = (Prob. Above Upper Break Even) + (Prob. Below Lower Break Even)
Max Risk = Net Debit = Cost Of Position
Where...
Net Debit = Premium of Bought Call + Premium of Bought Put
Example: Stock XYZ at $45.61 per share.
Buy the FEB 45 Call for $2.10
Buy the FEB 45 Put for $1.60
Max. Risk = Net Debit = $2.10 + $1.60 = $3.70
Upper Break Even= Strike + Net Debit = $45.00 + $3.70 = $48.70
Lower Break Even= Strike - Net Debit = $45.00 - $3.70 = $41.30
Advantages of this strategy:
Long Straddle Option An investor can profit from this position if the stock moves in either direction.
Long Option Straddles The potential profits on the upside are unlimited as the stock could go up infinitely.
Long Straddle Option The potential profits on the downside can be very high as well.
Long Option Straddles The max loss is limited to the original cost of the position, i.e. the Net Debit
Long Straddle Option If volatility is low at the time of purchase and volatility rises, both options could profit even without an appreciable change in the stock price.
Long Option Straddles No stock is actually owned. (uncovered position).
Cautions with this strategy:
Long Straddle Option If the stock remains at the original stock price, both of the options will expire worthless and you will sustain the maximum loss (net debit).
Long Option Straddles If the stock rises above the strike price but remains below the upper break even or above the lower break even you will still incur a loss on the position.
Long Straddle Option If volatility falls for both or either option, the position could lose with or without a stock price swing.
Research Tips:
Bear Put Option Spreads If you like the idea of purchasing two options but are looking for a lower net debit: Long Strangle.
Bear Put Option Spreads If you were looking for short positions targeting a strike price at expiration: Short Straddle.

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Option Straddles - Long Straddles - Long Option Straddles
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