Straddle

Straddle

A straddle is an options trading strategy that involves buying or selling both a call option and a put option for the same stock, with the same strike price and expiration date. This strategy is used when a trader expects the stock to move significantly, but is not sure which direction it will go.

Here’s how a long straddle works: the call option makes money if the stock price goes up. The put option makes money if the stock price goes down. If the stock moves sharply in either direction, one of the options can become very profitable. The goal is for the gain on one option to outweigh the cost of both.

For example, imagine a company is about to announce earnings. You expect the stock to move a lot based on the news, but you don’t know whether the news will be good or bad. A long straddle lets you potentially profit either way, as long as the stock moves enough.

However, if the stock price stays close to the strike price, both options could lose value. This is the main risk of a long straddle - if the stock does not move much, the trader can lose the money paid to buy the options.

A long straddle (buying both options) profits from volatility. A short straddle (selling both options) profits when the stock stays stable, but comes with higher risk if the price moves sharply.

Why it matters: Straddles are powerful tools for trading around uncertain events. They help traders take advantage of market volatility, even when they are unsure of the direction.

Visit GLOBAL ABAS for more insights.

Disclaimer: This post is for informational purposes only and does not constitute financial, legal, or investment advice. Please consult a qualified professional for guidance tailored to your situation.

For personalized support, contact GLOBAL ABAS Consulting, LLC with your specific questions or concerns.

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