Home TECHNOLOGY What You Need to Know About Long Straddles

What You Need to Know About Long Straddles

by Mangal Tiwari
What You Need to Know About Long Straddles

Although options strategies come in different types, two integral options define them; calls and puts. These options strategies include; straddle, strangle, covered call, and protective call. They are all meant to help respective traders profit from the market’s underlying movements.

Options strategies are meant to profit the trader regardless of whether the market curve moves up or down.

Long straddles is an options strategy where a trader buys both a long call and long put on the same asset with the same price. Since the trader has purchased both the long call and short put, they can catch the market no matter the direction it decides to move.

Markets are designed to move in three directions; up, down or sideways.

How does it work?

A trader will earn a profit when the price of the market’s security goes up or down of the strike price with an amount higher than what the trader paid for. Traders use this option for their purchases when they are unsure if the market will go up or down.

The cost of creating this strategy is computed by the price that a trader purchases the put and call combined. To be safe, you should only use this option when the expiry date is far away. It would help if you went for it when the market is much undervalued because it’s less risky then.

Advantages of long-straddles

There is limited risk

When you use this option, you already know what the maximum loss will be. This is because the maximum amount of loss that can be accrued in this strategy is the sum of the cost of put and calls options.

The only way you can lose money in this option is if the expiry date is reached and the strike price and the underlying market price are the same.

There is unlimited profit

What makes long straddle more profitable is that there is no limit to how the market curve can go. And even when the market declines, it is very much profitable. Since the stock price in any given market can only drop as low as 0, that makes it unlikely for it to record a loss.

It is not sensitive to time

Among all the option strategies, it is the one that can stand the test of time. When the stock market is stagnant for some time, it still racks up better numbers and avoids losses for a long time.

You don’t need to predict the price accurately

The most important thing you need to keep in mind when using this option is the expiry date. You don’t need to be pressured to predict whether the price will rise or fall; just make a smart trade in the stock market before it expires.

Conclusion

If you’re a very cautious trader about the risks involved in the market, long straddles are the best option for you. Long straddle is even better for you to make profits still and improve your trading knowledge.

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