What is the Long Straddle Options Strategy?

Last Updated: 4 Feb 2025

Long Straddle Options Strategy: Meaning, Types & Benefits

You can be an amateur investor who is just starting and trying different strategies or a professional who knows when and where to invest money. However, one thing is universal and known to both types of investors: The financial market is volatile. Volatility is the phenomenon where the price of assets in the financial market moves rapidly. It means that the price can fall or rise in a short period. Generally, volatility is seen as an opposing force that can result in investors losing money. However, for professional investors who have experienced, learned, and tackled the market for many years, volatility in either direction is a welcome way to make profits.

Making profits amid volatility is not easy if you have limited knowledge about various asset classes. Furthermore, investing solely in stocks in a volatile market without the right information is sure to push you towards losses. However, successful investors make profits irrespective of the current trend of the market.

If you ask any successful trader about the strategies they use to make profits in a volatile market, the conversation always leads to Derivative trading and its type called Options Trading.

What is the Long Straddle Strategy?

A Long Straddle Strategy consists of buying a long call and put option simultaneously. Both of the options have the same underlying asset, strike price, and expiration date. A Long Straddle strategy is a neutral strategy that aims to make profits in a highly volatile market, i.e. when investors think that the price movement may be considerable and may fall or rise by a huge margin. Such volatility may arise at the time of the declaration of budget, a company’s results, or any big market-related news or event.

Maximum Profit in Long Straddle Strategy: This is unlimited and based on the underlying asset’s price rise. The higher it rises, the higher the potential profits. On the downside, the profits are limited but substantial as, in theory, the asset’s price may fall to zero.

Maximum Loss in Long Straddle Strategy: This is the total cost of the Long Straddle plus commission. It is limited to the amount of loss if both contracts are held until the expiration date, and they expire worthlessly. It happens when the strike price is equal to the spot price of the underlying asset at the time of expiry.

Long Straddle Versus Short Straddle: The long straddle options strategy involves buying both a call and put option with the same strike price and expiration date, betting on significant price movement in either direction. In contrast, the short straddle involves selling both options, aiming to profit from minimal price movement. Both long straddle options strategy and short straddle have their unique risks and rewards, catering to different market outlooks.

Long Straddle Strategy example: How does Long Straddle Options Strategy work?

Consider the following example:

An investor wanting to execute a long straddle strategy may do the following transactions:

• Buy September 50 Put – Rs 5
• Buy September 5o Call – Rs 5

Here, the underlying asset is trading at Rs 50 (spot price), Rs 5 is the premium amount, and there are 100 shares in one lot. Hence:

• Buy September 50 Put: 100×5 = Rs 500
• Buy September 50 Call: 100×5 = 500

Net Debit (Loss) of premium: Rs 500 + Rs 500 = Rs (1,000)

Scenario 1: The asset’s price remains unchanged at Rs 50.

• Buy September 50 Put – Expires worthless
• Buy September 50 Call – Expires worthless

Net Debit (Loss) of premium: Rs 500 + Rs 500 = Rs (1,000), that was paid initially.

Total Loss: Rs 1,000.

Scenario 2: The asset’s price rises to Rs 70.

• Buy September 50 Put – Expires worthless
• Buy September 50 Call – Expires in-the-money with a value of (70-50)x100 = Rs 2,000

Net Debit (Loss) of premium: Rs 500 + Rs 500 = Rs (1,000), that was paid initially.

Total Profit: Rs 1,000 (Rs 2,000 – Rs 1,000).

Scenario 3: The asset price falls to Rs 30.

• Buy September 50 Put – Expires in-the-money with a value of (50-30)x100 = Rs 2,000
• Buy September 50 Call – Expires worthless

Net Debit (Loss) of premium: Rs 500 + Rs 500 = Rs (1,000), that was paid initially.

Total Profit: Rs 1,000 (Rs 2,000 – Rs 1,000).

Total Loss: Rs 1,000.

From the above example, you can see that a long straddle options strategy earns profits even when the underlying asset’s price goes down. It can ensure that the investments are protected at the time of volatility and when investors are not sure about the market trend.

How to Implement a Long Straddle?

Implementing a long straddle options strategy involves the following steps:

1. Select the Asset: Choose a stock or index with expected significant price movement.
2. Buy Options: Purchase both a call and put option at the same strike price and expiration date.
3. Monitor Market Movements: Keep an eye on the asset’s price movement to decide on the best time to exit.

This strategy can be implemented through your brokerage platform, where you can easily execute both options trades simultaneously.

Understanding Long Straddles

Long straddle options strategy is designed to profit from significant price movements in either direction. Here’s how it works:

Market Volatility

The success of the long straddle options strategy relies on market volatility. Significant price movements, either upwards or downwards, can lead to substantial profits.

Example 1: Stock ABC

Imagine purchasing a call and put option for Stock ABC at a strike price of $50, expiring in one month. If the stock rises to $70 or falls to $30, substantial profits can be realized.

Example 2: Market Indices

Using a long straddle options strategy on market indices like the S&P 500 can also be lucrative. If the index experiences significant volatility, profits can be achieved regardless of the direction.

By understanding the dynamics of the long straddle options strategy, traders can effectively utilize it during periods of high expected volatility.

Benefits and risks associated with Long Straddle Options Strategy

Like all other financial strategies, the Long Straddle Options Strategy is also with its advantages and disadvantages. These are as follows:

Advantages:

• The Long Straddle Options strategy is neutral and is not influenced by the market direction.
• Even when the price movement is negative or in a highly volatile market., the Long Straddle strategy allows investors to make considerable profits.
• There is less chance of losing the entire cost of a straddle if it is held until expiration.
• Long Straddles are overall less sensitive to time decay than other types of strangles.

Disadvantages:

• As purchasing in-the-money options cost more than out-of-the-money options, implementing a Long Straddle Options strategy can be expensive.
• The Long Straddles strategy can be complex to execute and requires a high level of knowledge to execute and make a profit.
• As markets may follow a certain trend, it can become hard to find volatility in the market, leaving a long straddle strategy useless.
• As the cost is high, investors end up buying fewer straddles, limiting the potential for profits.

Example of a Long Straddle

Let’s consider a practical example to understand the long straddle options strategy:

Stock XYZ
Purchase Call Option: Buy a call option for Stock XYZ at a strike price of $100, expiring in 30 days.
Purchase Put Option: Simultaneously, buy a put option at the same strike price and expiration.
If the stock’s price rises to $130, the call option becomes highly profitable. Conversely, if the price falls to $70, the put option yields significant returns. Regardless of the direction, the long straddle options strategy can potentially deliver profits.

Conclusion

The long straddle options strategy is a versatile tool for traders anticipating significant price movements. By purchasing both call and put options, traders can profit from volatility, regardless of the direction of price changes. Understanding how to implement and utilize the long straddle options strategy effectively can enhance trading outcomes. Regularly evaluating market conditions and making informed decisions are key to maximizing the benefits of this strategy.

Frequently Asked Questions

Q1.When should Long Straddle be used?

Investors can use Long Straddle in a highly volatile market. As the strategy rewards potential profits at either side of price movement, it can be a great way to multiply your wealth.

Q2.Is Long Straddle a good strategy?

Yes, Long Straddle is considered to be one of the best and most profitable options strategies because of its potential to make profits in both a bear or a bull trend in the market.

Q3.Is Long Straddle Bullish?

No, a Long Straddle is not bullish as it can make profits in a bear market too. For Long Straddle to work, the price movement can be both positive or negative (bullish or bearish), making the strategy neutral.

Q4.Why do people buy Long Straddles?

Buying a Long Straddle allows investors to benefit from the rise or fall of the underlying asset’s price. Apart from Long Straddle, this type of opportunity is not available in any other Options strategy.

Q5. Can a Long Straddle be used for both stocks and indices?

Yes, the long straddle options strategy can be used for both stocks and indices. This strategy involves buying both a call and put option at the same strike price and expiration date, making it versatile for different assets experiencing significant price movements.

Q6. How does the cost of a Long Straddle affect its profitability?

The cost of a long straddle options strategy impacts its profitability as it involves purchasing two options. Higher premiums mean greater initial investment, requiring significant price movement in the underlying asset to cover costs and generate profits. Careful analysis is crucial to ensure profitable outcomes.