Options Trading Strategies: Long Straddle

The long straddle (otherwise called a buy straddle) is a two-legged strategy, created by buying one At The Money call and one At The Money put, both with the same expiration date and a strike price.

When to use this strategy?

You are bullish on volatility, anticipating a drastic move in the underlying price and looking for a neutral trade for a capital gain.

Below is a Profit and Loss chart example of a long straddle options strategy:

Pros:

Capped maximum loss. Uncapped maximum profit potential.

Cons:

Expensive as you have to pay upfront to buy both the ATM call and put. You need drastic movement of the BTC/ETH price to make a profit.

Example:

In this example, BTC is trading at 43,771.46 USD, and you expect its price to move in either direction. You have bought an ATM call and an ATM put both with a strike price of 44,000.00 USD, with an expiration date of February 11^th 2022.

As this is a net debit spread, you have paid a net premium of 1,928.52 USD which is also your maximum loss.

The Profit and Loss chart is given below:

Upon expiration:

If the BTC price is below the strike price, the call expires worthless, the long put is exercised, so you are in the profit as long as the bitcoin price ends up below the first break-even point.

If the BTC price is at the strike price of a long straddle, then both the call and the put expire worthless, and you are at your maximum loss.

If the BTC price is above the strike price at expiration, the put expires worthless, the long call is exercised, so you are in the profit as long as the bitcoin price ends up above the second break-even point.

BTC at Expiry (USD)	Payoff (USD)
40,553.00	+1,518.48
41,398.00	+678.48
42,071.48 (break even 1)	0
42,995.00	-923.52
44,000.00 (LC x LP ATM)	-1,928.52 (max loss)
45,007.00	-921.52
45,928.52 (break even 2)	0
46,455.00	+526.48
47,445.00	+1,516.48