Tim Olson
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description, tags
| description | tags | ||||
|---|---|---|---|---|---|
| A volatility strategy buying an ATM call and an ATM put at the same strike K, profiting from a large move in either direction. |
|
Long Straddle
Section: 2.22 | Asset Class: Options | Type: Volatility
Overview
The long straddle is a volatility strategy consisting of a long position in an ATM call option and a long position in an ATM put option with the same strike K. This is a net debit trade. The trader's outlook is neutral (non-directional). This is a capital gain strategy that profits from a large move in either direction.
Construction
- Buy 1 ATM call option at strike K
- Buy 1 ATM put option at strike K, same expiry
Net debit: D
Payoff Profile
f_T = (S_T - K)+ + (K - S_T)+ - D
- Upper breakeven: S*_up = K + D
- Lower breakeven: S*_down = K - D
- Max profit: P_max = unlimited (stock can move far in either direction)
- Max loss: L_max = D (if S_T = K exactly at expiry; both options expire worthless)
Key Conditions / Signals
- Neutral directional view; expects a large move but uncertain of direction
- Low implied volatility environment makes the debit cheaper to enter
- Ideal before high-impact events (earnings, central bank announcements)
Notes
The maximum loss is limited to the net debit paid. The position benefits from a rise in implied volatility (long vega). Time decay (theta) works against the position; the stock must move enough to overcome the debit paid.