Knowing when to invest and how to invest in it can be tricky - even for the experienced investor. When it comes to options trading there are a myriad of strategies that can be used. In our previous articles, we covered some common basic strategies, income strategies, and more advanced strategies like iron condors and butterflies used in options trading.
In this article, we delve into the two types of straddle strategies used in options trading and what benefits and risks these strategies present to the trader.
Straddles
A straddle involves purchasing or selling a call and a put with the same strike price and expiration. This type of strategy is generally used by traders who are not sure which way the price of the underlying asset will move. There are two types of straddles - long and short. We break down what each type is and how it is used by investors. This strategy is often used by traders before major events like earnings reports, economic announcements, or elections, are anticipated and where volatility is expected.
Long Straddle
• Setup: Buy one call and one put at the same strike price and expiration.
• Objective: Profit from a large move in the underlying asset in either direction.
• Market view: Expecting high volatility.
• Max gain: Unlimited (for large price moves).
• Max loss: Limited to the premium paid for both options.
Benefit: Using this strategy has the potential for unlimited profit if the price moves significantly. No directional bias; profits in either direction.
Risks: Investors need to be aware of the high upfront cost (double premiums). And there is also a risk of losing premiums if the market doesn’t move much.
Short Straddle
• Setup: Sell one call and one put at the same strike price and expiration.
• Objective: Profit from low volatility; keep the premium collected.
• Market view: Expecting low volatility and little price movement.
• Max gain: Premiums received.
• Max loss: Unlimited (if the price moves significantly).
Benefit: Gains from time decay and low volatility.
Risks: There is unlimited risk for large price moves. This strategy requires strong risk management.
Example:
Below is an example of how a long and short straddle strategy works. Here we use Walmart (WMT) as a primary example.
Source: Tiger Trade app 20/02/2025. Please note trading fees are not considered in the calculations.
If the stock of Walmart (WMT) is trading at $104, a trader could:
Long straddle: Buy a $105 call and a $105 put.
Short straddle: Sell a $105 call and a $105 put.
If the stock moves significantly (e.g., to $120 or $80), the long straddle profits, while the short straddle incurs losses.
Summary of straddles:
Strategy | Market View | Risk | Reward | Key Feature |
|---|---|---|---|---|
Long straddle | High volatility | Limited | Unlimited | Profits in either direction. |
Short Straddle | Low volatility | Unlimited | Limited | Profits from price stability. |
Always remember that any investing carries risk and if you aren't sure about something it's best to speak to a financial adviser.
Visit our Options Trading page on the website to explore more opportunities. Join Tiger Trade and practice options trading with no real capital risk by using the Tiger Trade demo account. Plus, if you open and fund an account, you'll get four $0 brokerage monthly trades on either ASX, US stock, ETFs or US options.*
*New clients & unfunded existing clients only. Only min. brokerage waived for 4 ASX, US stocks or ETFs or options trades. Third-party fees and other fees still apply. See T&Cs for details.
Please note that not all option strategies are available on Tiger Trade, however, have been included for education purposes.
Capital at risk. Options trading carries a high level of risk and may not be suitable for all investors. You should only trade with money you can afford to lose. See FSG, PDS, TMD and T&Cs via our website before trading. Information provided may contain general advice without taking into account your objectives, financial situations or needs. Past performance is no guarantee of future results. Graphics and charts are for illustrative purposes only. Tiger Brokers (AU) Pty Limited. ABN 12 007 268 386 AFSL 300767
