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Option Strategies Details

Setup

Buy 1 ATM Call and Buy 1 ATM Put

Typical Application

1. Speculate on increasing volatility and a large increase or large decrease in price

Volatility forecast

Up

Price forecast

Up a lot or Down a lot

Breakeven

Bought Strike Price plus the Premium (debit) paid or minus the Premium (debit) paid

Max contract loss

Cost of the Straddle

Max position loss

same as Max Contract Loss

Long Straddle

2 Legs
Debit
Intermediate
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You buy (long) an ATM Call and buy (long) an ATM Put

Description

A trader who wants to speculate on an increase in volatility and a large increase or large decrease in price can buy a Straddle. The trader pays a debit for the whole position, called a premium.

Suppose stock XYZ is trading at $165. You forecast an increase in XYZ volatility and a large increase or a large decrease in XYZ price.

You buy a $165 Straddle (buying the $165 Put and buying the $165 Call) for a $11.40 debit to express this view. You have two breakeven prices: either $165 (strike price of the bought Call and bought Put) - $11.40 (premium paid) = $153.60 or $165 (strike price of the bought Call and bought Put) + $11.40 (premium paid) = $166.40, but since the time component of your trade plan may not extend all the way to expiration you should be prepared to buy to close at a variety of XYZ prices as the market value of your $165 Straddle changes.