← Strategy LabLesson 21 · 4:09
Long straddle
Summary
Use a long straddle when you expect XYZ to make a big move but have no idea which way. You buy the $100 call for $345 and the $100 put for $341, paying $686, which is the most you can lose if XYZ ends right at $100. There is no limit on the gain above, the gain below climbs until XYZ reaches zero, and you break even at $93.14 or $106.86.
Key terms
- long straddle
- Buying a call and a put at the same strike and expiry, to profit from a big move either way.
- bet on size, not direction
- time value
- The rest of an option's price, paid for the chance things get better before the end, and gone by the last day.
- volatility
- The size of the swings a stock is expected to make, written as a yearly percentage, saying how far but not which way.
- break-even on either side
- T plus zero line
- The blue line on the chart showing your result today, if you closed the trade right now.
- Bet on size
- A trade that pays when the stock moves far enough, whichever way it goes.
Check yourself
Answer each question to see why the right answer is right.
1. What does this long straddle cost in all?
2. Where do you break even on the last day?
3. XYZ ends at $110 on the last day. What is your result?
4. XYZ ends at exactly $100 on the last day. What is your result?
5. XYZ is at $105 and days pass with nothing else changing. What happens to your result?
Finished the video and the quiz? .