Tim Olson
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34 lines
1.5 KiB
Markdown
34 lines
1.5 KiB
Markdown
---
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description: "A volatility strategy buying an ATM call and an ATM put at the same strike K, profiting from a large move in either direction."
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tags: [options, volatility, neutral, straddle]
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---
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# Long Straddle
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**Section**: 2.22 | **Asset Class**: Options | **Type**: Volatility
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## Overview
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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.
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## Construction
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- Buy 1 ATM call option at strike K
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- Buy 1 ATM put option at strike K, same expiry
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Net debit: D
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## Payoff Profile
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f_T = (S_T - K)+ + (K - S_T)+ - D
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- Upper breakeven: S*_up = K + D
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- Lower breakeven: S*_down = K - D
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- Max profit: P_max = unlimited (stock can move far in either direction)
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- Max loss: L_max = D (if S_T = K exactly at expiry; both options expire worthless)
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## Key Conditions / Signals
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- Neutral directional view; expects a large move but uncertain of direction
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- Low implied volatility environment makes the debit cheaper to enter
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- Ideal before high-impact events (earnings, central bank announcements)
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## Notes
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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.
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