A straddle is a neutral options strategy that involves simultaneously buying both a put option and a call option or selling both a put option and a call option for the underlying security with the same strike price and the same expiration date. There are two types of straddle strategy. A long straddle aims to make a profit when stock prices are expected to go up or down significantly and a short straddle earns a return when the stock prices are expected to stay stable or move in a narrow range near the strike price.
A long straddle is a strategy when you expect the price of the underlying security will go up or down significantly within a certain time period. It is created by buying a call while simultaneously buying a put of the same underlying security, the same expiration date, and the same strike price. This strategy is established for a net debit (or net cost) and profits if the underlying security rises above the upper break-even point or falls below the lower break-even point at expiration.
A short straddle is a strategy when you expect the price of the underlying security will stay stable or move in a narrow range near the strike price within a certain time period. It is created by a short call and a short put with the same expiration date, and the same strike price. This strategy is established for a net credit and profits if the stock price is between the two break-even prices at expiration.
Option trading entails significant risk and is not appropriate for all investors. Option investors can rapidly lose the entire value of their investment in a short period of time and incur permanent loss by expiration date. You need to complete an options trading application and get approval on eligible accounts. Please read the Characteristics and Risks of Standardized Options and Option Spread Risk Disclosure before trading options.