Long Straddle
Candlefocus EditorThe investor who enters into a long straddle options trading strategy knows that the underlying asset may move either way due to the event and will capitalise on either of the two directions. This means that he/she is prepared to go long with the call option and short with the put option. Thus, allowing the investor to make a profit in both rising and falling markets by buying the option when the asset falls and selling the option when the asset rises.
The main risk associated with the long straddle strategy is that the investor pays for both the call and the put options, but there is a possibility that the results of the news might not be strong enough for the market to move back and forth as anticipated. If so, the investor will incur losses from the options that he/she purchased and will therefore not be able to profit from them.
Consideration should also be made to the impact of implied volatility changes arising from the strategy. If a large number of investors enter into a long straddle trading strategy, the demand for out-of-the-money options will increase and thus push the implied volatility up. This could potentially be lucrative for investors who enter into the strategy prior to the implied volatility increasing as they will then be able to sell the options at an inflated premium.
In conclusion, the long straddle strategy is aggressive trading method used by investors when they have a neutral view of the market. It involves the purchase of both a call and put option on the same underlying asset with the same expiration date and strike price. The goal of a long straddle strategy is to capture a large movement in many directions that could be triggered by a newsworthy event, in order to make a profit. However, investors need to be aware of the potential risks associated with this strategy, such as the potential failure of the news event to have a large enough effect on the asset’s price to cover the costs of the options purchased in the strategy.