Long straddle

Article contents



At a glance



Setting up the strategy

  1. Buy one at-the-money (ATM) call option on the underlying stock.

  2. Buy one at-the-money (ATM) put option on the same underlying stock, with the same strike price and expiration as the call option.
Ideally you want the stock to either significantly rise in price or drop in price.

Who should run this?


Advanced traders only.

Margin requirements


Learn more about Questrade’s option margin requirements.

Strategy overview



A straddle is an options strategy in which a trader buys (or sells) a put and call option of the same symbol simultaneously. Both options must also have identical expiration dates and strike prices.

There are two types of straddles:

Straddle type
Description
Long straddle (buy) Used by a trader who thinks the security will experience considerable, short-term volatility. 
Short straddle (sell) Used by a trader who thinks the security will experience limited, short-term volatility.

To learn more, see Short straddle.


Market outlook


  • Neutral

Strategy benefits

  • Allows you to profit whether the underlying stock price appreciates or depreciates in value.
  • Profit potential is unlimited if the underlying stock price moves in one direction (unlimited on the upside; substantial on the downside).
  • Maximum loss is limited to the option premium paid.

Strategy downsides


Loss can occur in several ways, depending on the various outcomes at expiration: 

  • if the underlying stock price remains neutral
  • if the underlying stock price moves above or below the strike price, but remains below the upper or above the lower break

Long straddle example



Scenario


Let’s say that ABC shares are currently trading at $70 in September. Since you think the stock will experience major volatility in the short term, you decide to employ a long straddle strategy. You purchase a $70 October put option for $250 and simultaneously buy a $70 October call option for the same price.


To enter into this position, you will be debited $500.


Possible results


  1. At expiration, ABC shares are trading at $80, meaning the put option expires worthless. However, the $70 call option would expire in the money, and subsequently the option would be assigned.  The call option’s intrinsic value would be $1000 (stock price – call strike price x number of shares in option contract). After subtracting the initial debit of $500, that would leave you with a $500 profit.

  2. At expiration, ABC shares are trading at $72, meaning the put option expires worthless. Again, the $70 call option would expire in the money and the option would be assigned. Although the call option’s intrinsic value would be $200, you would still lose $300 after subtracting the initial $500 debit.

  3. ABC shares are trading at $65 at expiration, meaning the call option expires worthless. This time, the put option is exercised and assigned and has a $500 intrinsic value. Minus the initial debit of $500, you would break-even.

Profit and loss explained



Maximum profit


The maximum profit will be calculated differently, depending on the direction of the stock price since the trader is holding long positions for both option types:


  • Maximum profit = stock price – strike price of long call option – option premium paid

  • or


  • Maximum profit = stock price – strike price of long put – option premium received

Maximum loss

Maximum loss = option premium paid

Break-even at expiration


There are two break-even points at expiration:

  • Strike price of long call + option premium paid
  • Strike price of long put - option premium paid

Sample calculations



  • Stock value at start of strategy: $70
  • To execute the strategy: Buy $70 put option for $250, Buy $70 call option for $250
  • Result: $500 net debit
Stock price at expiration Profit and loss calculations 
$65 $70 (strike price of long put option)
-$65 (stock price) x 100 (number of shares in option contract)
-$5 (option premium paid)  x 100 (number of shares in option contract)
= $0 (break-even)
$72 $72 (stock price)
-$70 (strike price of long put option)
- $5 (option premium paid)
x 100 (number of shares in option contract)
= $300 loss

$80 $80 (stock price)
-$70 (strike price of long call option)
-$5 (option premium paid)
x 100 (number of shares in option contract)
= $500 profit


Note
: commission fees are not included in the above calculations.


Long straddle payoff diagram






Creating a long straddle







Standard order details

Order detail

Description

Symbol lookup field

Click  and change the mode to . Then enter the symbol you want to buy or sell. The default expiration date, strike price, and strategy appear. 




Tip: click the Option tab to view a more detailed option quote.

Modify the expiration date, strike price, and option strategy accordingly. For more information, see Elements of an option quote.
Action

The buy or sell action is set for you when you select the strategy type.

Qty

Select a value using the arrows , or enter a value manually.

Note: by default, the quantity will be populated with the value set in your user preferences.
Order type Select the type of order you want to submit. When creating strategy orders, only Limit or Market order types are available. For more information, see Order types.

The limit order type requires you to fill in additional fields. Refer to the table section below for details.
Duration

Select a duration to specify how long the order should remain active. For more information, see Order durations.

Route Select a route or leave the selection at Auto to let the platform determine the best one. Canadian routes will be listed for Canadian symbols and U.S. routes will be listed for U.S symbols.
Sub-route

This field will be filtered according to the route selection. It indicates where you prefer the order to be executed. Leave the selection at Auto to let the platform determine the best route.

Note: sub-route selection is only available for Canadian symbols.
Order type-specific details
Limit price Enter your limit price:

  • To have the price fluctuate according to real-time data, select . The icon changes to a lock icon , which locks the limit price. Once locked, use the refresh button to automatically update your limit price.
  • To choose a custom price, select .
Note: if real-time market data is not available, the limit price will be blank and the float limit icon will be unlocked.






Note: the video tutorial above shows how to create a long straddle strategy using IQ Edge; however, the principles are the same for IQ Web.
Tip: for an optimized viewing experience, watch the video on YouTube in full 720p HD. To open the video in YouTube, click the YouTube button in the bottom right corner of the video window and select the change settings icon to modify the video quality.


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