Name: Long Straddle
Setup: Buy (long) Strike A put and Buy (long) Strike A call
Bias: Bullish and Bearish – expecting a big move but unsure of direction
Break-Even: Two break-even points:
- Strike A + Debit paid
- Strike A – Debit paid
Max Profit: Unlimited
Max Loss: Limited: Debit paid
Margin: No margin required
Time Decay: Time decay is an extreme negative effect since it will drop the value of both of your options
Implied Volatility: After you establish the position you want implied volatility to increase so the value of your options increase and to make the necessary move you originally planned for
Notes: Long straddles can be hard to profit from due to the wide move the underlying needs to make before your position gets beaten down by time decay. Even if you are expecting move such as an earnings announcement or report coming out the options could already be priced so high that it cannot capture the move. Always make sure you find the price of an at-the-money (ATM) straddle to see how big of a move the market is expecting. You can use gamma scalping to protect and increase your gains with long straddles (we will touch more on this later).
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