What Is Long Straddle: A Guide For Risk-Loving Traders

Did you know there are other options besides buying or selling equity? You'll want to read on if you're a risk-taking, thrill-seeking investor. A long straddle is a high-risk option in equity trading that has the potential for a big payoff. You can only execute this trade if you are willing to accept a large loss (in case your prediction is wrong) and be patient enough to wait out the result. The long straddle is not as common as other options when it comes to trading stocks but is still worth knowing about. A straddle strategy is an options trading strategy that involves buying both a put and a call on the same asset with the same strike price and expiration date. A long straddle is when you simultaneously buy both a put and a call with the same strike price and expiration date. The long straddle strategy is also referred to as "straddling." This article explains a long straddle strategy, how to implement it, and its benefits and disadvantages. Read on and find out how this risky strategy works and whether it's right for you.

What is a Long Straddle?

A long straddle is a combination of buying a call option and a put option at the same time. Both call and put options are used when trading equities to protect against market movements (bullish or bearish). On the whole, this is a high-risk trading strategy that has a low probability of succeeding. A long straddle combines buying a call option and a put option simultaneously, with the same strike price and expiry date. A long straddle gives you the right to buy or sell equities at a specified price, which means you have the risk of unlimited loss if the trade goes against you.

How does the Long Straddle work?

The long straddle strategy is to bet on the increase or decrease in share price. You are prepared for any market movement when you purchase both a call option and a put option. This means that if the share price moves up, you can profit from the call option but will lose money on the put option. Conversely, if the share price moves down, you can profit from the put option but lose money on the call option. This strategy works best when you expect extreme volatility in the price of the equity. This is why it is often used as a bearish trading strategy, where you expect a downward price movement. Although it is risky, it can be profitable if you choose the right share and use a strike price that is low enough to make a profit.

Benefits of a Long Straddle Strategy

The main benefit of a long straddle strategy is that it provides a higher profit potential than other trading strategies. You can profit from a long straddle strategy by a rising or falling price of the underlying. If the underlying price doesn't move, you don't make any money, but this is true for most other trading strategies.

The higher profit potential of a long straddle strategy comes from the fact that you are collecting more premium than you would for a long call or a long put strategy by buying both options. Since the premiums for both options are higher than for a call or a put option alone, your profit is also higher.

Another benefit of a long straddle strategy is that it provides protection against downward price movements. This is because you have a long put option position (selling a put option means that you promise to buy the underlying security at the strike price) that requires a rising price of the underlying security to make money. That means if the underlying security falls in price, you lose money on the put option. But with a long straddle strategy, you also have a long call option position (buying a call option means that you agree to sell the underlying security at the strike price) that requires a rising price of the underlying security to make money. This means that if the underlying security falls in price, you lose money on the call option. Suppose the underlying security doesn't move or rise. In that case, you don't make any money on the call option, but you profit from the rising price of the put option.

Another benefit of a long straddle strategy is that it provides leverage. You use leverage with a long straddle strategy because you need to put up a lower margin than for a long call or a long put strategy. The margin for a long straddle strategy is calculated as a percentage of the total value of both options times their total miles.

Suppose you have a long put option position and a long call option position on the same underlying security. In that case, you have a straddle position. In other words, you have a long straddle strategy when you buy a put and a call option on the same underlying security with the same strike price and expiration date.

Cons of the Long Straddle

- High risk of break-even - This strategy has a high chance of not making a profit.

- High risk of unlimited loss - If you predict the market incorrectly, you could lose all of your money.

- You need accurate timing - You need to be correct in your prediction of the market movement.

- You have no control over the outcome - You have no control over the result of the trade.

- You need to be patient - This is a high-risk strategy where you will either lose or profit over a longer period.

- Equity selection is important - You need to carefully select the equity to trade.

Strategies to Mitigate Risk with a Long Straddle

- Limit your risk - You can limit the amount you risk on the trade. This can be done by using the right strike price or decreasing the number of contracts you buy.

- Time your trade - You can time your trade so that it ends before significant events occur. This could be earnings season or a product launch.

- Trade on an anticipated movement - You can trade on an anticipated movement in the share price. For example, you could buy a put option when a company has negative press.

- Trade on potential mispricing - You can trade on anticipated mispricing in the market. For example, a stock could be mispriced because of an error in the pricing model.

- Trade on anticipated volatility - You can trade on anticipated volatility in the market. For example, you could buy a call option when you expect a political event to cause a volatility spike.

Conclusion

The main advantage of a long straddle strategy is that you have a higher profit potential than other trading strategies. However, it also provides protection against downward price movements and uses leverage. The long straddle is a high-risk trading strategy that can make a lot of money if done correctly. It is known for its low risk of break-even, high-profit potential, and risks. The main disadvantage is that it requires patience, as you will not make money for longer. To mitigate risk, you can limit your risk, time your trade, trade on an anticipated movement, trade on potential mispricing, or trade on anticipated volatility.