Straddles

The Straddle involves the following steps:

Step 1.
buying ATM strike puts and
Step 2.
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:

 Straddle
Maximum riskNet debit of the spread (that is, what you pay)
Maximum rewardUnlimited
Breakeven on ...

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