Editing Straddle

{{Short description|Options combination in finance}}
{{about|the combination of financial derivatives}}
{{more footnotes|date=March 2016}}
In [[finance]], a '''straddle''' strategy involves two transactions in [[option (finance)|options]] on the same [[underlying]], with opposite positions. One holds [[Long (finance)|long]] risk, the other [[Short (finance)|short]]. As a result, it involves the purchase or sale of particular [[option (finance)|option]] [[derivative (finance)|derivatives]] that allow the holder to profit based on how much the price of the [[underlying]] security moves, regardless of the ''direction'' of price movement.

A straddle involves buying a [[call option|call]] and [[put option|put]] with same [[strike price]] and expiration date. If the stock price is close to the strike price at expiration of the options, the straddle leads to a loss. However, if there is a sufficiently large move in either direction, a significant profit will result. A straddle is appropriate when an investor is expecting a large move in a stock price but does not know in which direction the move will be.<ref>{{Cite journal|last=S|first=Suresh A.|date=2015-12-28|title=ANALYSIS OF OPTION COMBINATION STRATEGIES|url=http://inflibnet.ac.in/ojs/index.php/MI/article/view/3554|journal=Management Insight|language=en|volume=11|issue=1|issn=0973-936X}}</ref>

A straddle made from the ''purchase'' of options is known as a '''long straddle''', '''bottom straddle''', or '''straddle purchase''', while the reverse position, made from the ''sale'' of the options, is known as a '''short straddle''', '''top straddle''', or '''straddle write'''.<ref name="Hull 2006 options 234-236">{{cite book |last1=Hull |first1=John C. |authorlink=John C. Hull (economist) |title=Options, futures, and other derivatives |date=2006 |publisher=Pearson/Prentice Hall |location=Upper Saddle River, N.J. |isbn=0131499084 |pages=234–236 |edition=6th}}</ref><ref>{{cite book |last1=Natenberg |first1=Sheldon |title=Option volatility and pricing: advanced trading strategies and techniques |date=2015 |location=New York |isbn=9780071818780 |edition=Second |chapter=Chapter 11}}</ref>

==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.

==Short straddle==
[[Image:Shortstraddle.png|thumb|]]
A '''short straddle''' is a non-directional [[options strategy|options trading strategy]] that involves simultaneously selling a put and a call of the same underlying security, strike price and expiration date. The profit is limited to the premium received from the sale of put and call. The risk is virtually unlimited as large moves of the underlying security's price either up or down will cause losses proportional to the magnitude of the price move. A maximum profit upon expiration is achieved if the underlying security trades exactly at the strike price of the straddle. In that case both puts and calls comprising the straddle expire worthless allowing straddle owner to keep full credit received as their profit. This strategy is called "nondirectional" because the short straddle profits when the underlying security changes little in price before the expiration of the straddle. The short straddle can also be classified as a credit spread because the sale of the short straddle results in a credit of the premiums of the put and call.

The risk to a holder of a short straddle position is unlimited due to the sale of the call and the put options which expose the investor to unlimited losses (on the call) or losses limited to the strike price (on the put), whereas maximum profit is limited to the premium gained by the initial sale of the options.  Losses from a short straddle trade placed by [[Nick Leeson]] were a key part of the collapse of [[Barings Bank]].<ref>{{Cite web|url=https://www.next-finance.net/How-Nick-Leeson-caused-the|title=Stories - How Nick Leeson caused the collapse of Barings Bank|first=Paul|last=Monthe|website=Next Finance}}</ref>

==Straps and strips==
{{multiple image
 | image1 = Optsioonid Strap.png
 | alt1 = 
 | image2 = OptsioonidStripPO.png
 | alt2 = 
 | footer = Rough example payoff diagrams of a strap (left) and a strip (right)
}}

'''Straps''' and '''strips''' are modified versions of a straddle.<ref>{{cite web |title=Strap Explained |url=https://www.theoptionsguide.com/strap.aspx |website=www.theoptionsguide.com |access-date=5 January 2022}}</ref> Whereas a straddle consists of one put and one call at the same strike price, a strap consists of two calls and one put at the same strike price, while a strip consists of one call and two puts. Like a straddle, a strap or a strip allows the trader to profit from a large move in either direction, but while a straddle is directionally neutral, a strap is more bullish (used by a trader who considers an increase more likely than a decrease), and a strip is more bearish (used by a trader who considers a decrease more likely than an increase).<ref name="Hull 2006 options 234-236"/>

==See also==
* [[Butterfly (options)]]
* [[Strangle (options)]]

==References==
{{reflist}}

==Further reading==
* {{cite book
 | last = McMillan| first = Lawrence G.
 | title = Options as a Strategic Investment
 | edition = 4th
 | publisher = New York : New York Institute of Finance
 | year = 2002
 | isbn = 978-0-7352-0197-2
 }}
* {{cite book
 | last = McMillan| first = Lawrence G.
 | title = Options as a Strategic Investment
 | edition = 5th
 | publisher = Prentice Hall Press
 | year = 2012
 | isbn = 978-0-7352-0465-2
 }}

{{Derivatives market}}

[[Category:Options (finance)]]