Editing Straddle (section)

==Long straddle==
[[Image:Longstraddle.png|thumb|An option payoff diagram for a long straddle position]]
A '''long straddle''' involves "going long volatility", in other words purchasing both a [[call option]] and a [[put option]] on some [[stock]], [[interest rate]], [[index (economics)|index]] or other [[underlying]]. The two options are bought at the same [[strike price]] and expire at the same time. The owner of a long straddle makes a profit if the underlying price moves a long way from the strike price, either above or below. Thus, an investor may take a long straddle position if he thinks the market is more [[Volatility (finance)|volatile]] than option prices suggest, but does not know in which direction it is going to move. This position is a limited risk, since the most a purchaser may lose is the cost of both options. At the same time, there is unlimited profit potential.<ref>{{cite book |title=The Complete Idiot's Guide to Options and Futures |last=Barrie |first=Scott |year=2001 |publisher=Alpha Books |isbn=0-02-864138-8 |pages=120–121 }}</ref>

For example, company XYZ is set to release its quarterly financial results in two weeks. A trader believes that the release of these results will cause a large movement in the price of XYZ's stock, but does not know whether the price will go up or down. He can enter into a long straddle, where he gets a profit no matter which way the price of XYZ stock moves, if the price changes enough either way. If the price goes up enough, he uses the [[call option]] and ignores the [[put option]]. If the price goes down, he uses the [[put option]] and ignores the [[call option]]. If the price does not change enough, he loses money, up to the total amount paid for the two options. The risk is limited by the total premium paid for the options, as opposed to the short straddle where the risk is virtually unlimited.

If the options are [[American option|American]], the stock is sufficiently volatile, and option duration is long, the trader could profit from both options. This would require the stock to move both below the put option's strike price and above the call option's strike price at different times before the option expiration date.