The Straddle involves the following steps:
buying ATM strike puts and
buying ATM strike calls with the same expiration date.
This will be a net debit transaction because you are paying for equal numbers of calls and puts. As such, the Straddle is an expensive strategy in terms of a cash requirement. However, if you play the strategy correctly, it needn’t be a high-risk strategy even if the anticipated volatile price action doesn’t materialize.
Diagram 8.1. Straddle.
The risk profile of a Straddle is as follows:
|Maximum risk||Net debit of the spread (that is, what you pay)|
|Breakeven on ...|