Trading the Straddle
In derivatives trading, a straddle is a popular trading strategy that involves buying both a call option and a put option on the same underlying asset, at the same strike price, and with the same expiration date.
By purchasing both a call option and a put option, the trader is betting that the underlying asset will experience significant price volatility, but is uncertain about the direction of the price movement.
If the price of the asset increases, the trader profits from the call option, and if the price decreases, the trader profits from the put option.
The potential profit from a straddle can be unlimited if the price of the underlying asset moves significantly in either direction. However, if the price remains relatively stable, the trader can suffer losses from the premiums paid for both the call and put options.
Straddles are often used by traders to profit from major events such as earnings reports, product launches, or regulatory decisions that could cause significant price movements in the underlying asset.
Let´s see, my dear reader, a couple of examples of straddle positions with hypothetical numbers to help illustrate the concept:
Example 1: Let’s say that stock XYZ is currently trading at $100 per share, and a trader believes that the company is going to make a major…
