Straddling as an Option Trading Strategy

The long straddle is an option trading strategy that traders use to establish a market position no matter which direction the market moves. The long straddle involves buying a call option and a put option at the same time.  The options will have the same underlying asset, the same strike price and the same expiration date.  Another way to say it is that you will purchase what is called a long call and a long put in this option trading strategy.

A Moving Market

The straddle option trading strategy gets its name because you straddle the market with a put and a call. You are in a market position that can take advantage of a rising or falling market. The risk is limited to the premium plus any trading costs you pay. The strike price of the options should be near or at the money.

For the option to have value in the long straddle option trading strategy before expiration the market must move. It if goes sideways, the option will be worthless because profit comes from changes in the underlying security price.

This strategy is applicable to markets that experience cycles or are expected to move significantly due to anticipated news impacting the underlying asset. If the cycle occurs, then you can take profit on one side of the spread. As the cycle progresses you can then earn profits on the long trading strategy by taking profits on other side of the spread.

To effectively use the long straddle option trading strategy in a cyclical market, you need to have an expiration date that gives the market time to move. Long straddles have unlimited profit and limited risk.

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• Options Call and Put form the Foundation of Trading