The popularity of options trading in India is increasing day by day, as options can be great tools for generating wealth. There are several strategies options traders may adopt to generate income, one of them being the long straddle strategy. However, before getting into the specifics of the long straddle, remember that a call option gives you the right to purchase the underlying asset at a specific price (strike price) on or before a certain date (expiration date). On the other hand, a put option gives you the right to sell the underlying asset at a specific price on or before a certain date.
What is the Long Straddle?
The long straddle strategy involves buying both a call option and a put option on the same underlying asset, with the same strike price and expiration date. By purchasing both options, you are essentially creating a “straddle” that allows you to profit from both upward and downward movements in the price of the underlying asset. This strategy is a popular choice among investors who believe that the price of an underlying asset will experience significant volatility in the near future, but are unsure of the direction of that movement.
For example, let’s say the underlying asset is a stock and the current market price is Rs.50. You believe that the stock will experience significant volatility in the next month, but are unsure if it will go up or down. In this scenario, you can purchase a call option with a strike price of Rs. 50 and an expiration date one month from now using your options trading app. At the same time, you also purchase a put option with a strike price of Rs.50 and an expiration date one month from now.
If the stock price goes up to Rs.60 in the next month, your call option will increase in value while your put option will decrease in value. You can then sell the call option for a profit and let the put option expire worthless. On the other hand, if the stock price goes down to Rs.40 in the next month, your put option will increase in value while your call option will decrease in value. You can then sell the put option for a profit and let the call option expire worthless.
Should You Use the Long Straddle Strategy?
It’s worth noting that the long straddle strategy is a high-risk, high-reward strategy. The potential profit is unlimited, but the potential loss is also unlimited. This is because the strategy requires a larger investment than buying only a call or put option because it involves purchasing two options. It also requires a significant increase in the price of the underlying asset in order to be profitable. This means that if the stock price doesn’t move much, both options will expire worthless, and you’ll lose the money you’ve invested in both options.
It’s also important to keep in mind that the long straddle strategy is best used by experienced investors who have a good understanding of options trading and the underlying asset. It’s crucial to have a thorough understanding of the underlying asset’s volatility, historical price movements, and any upcoming events that might affect the price. Additionally, it’s important to have a solid risk management plan in place to limit potential losses.
Long Straddle VS Long Strangle
The long straddle and the long strangle are similar options trading strategies, but there is an important difference between the two. A long strangle also involves buying both a call option and a put option on the same underlying asset, but, unlike a long straddle, the strike prices in a strangle are different. The call option is usually bought at a higher strike price than the put option. This strategy is also used when an investor believes that the price of the underlying asset will experience significant volatility in the near future, but is unsure of the direction of that movement.
Conclusion
In conclusion, the long straddle options strategy is a trading strategy that allows you to profit from both upward and downward movements in the price of an underlying asset. It’s a high-risk, high-reward strategy that is best used by experienced investors who have a good understanding of options trading and the underlying asset. It requires a larger investment and a significant increase in the price of the underlying asset in order to be profitable. As always, it’s important to have a solid risk management plan in place to limit potential losses. If you want to start options trading in India. You can open a free demat account and trading account with Share and start options trading using the Share India option trading app.
