The Straddle is a neutral options strategy that involves buying a Call and a Put option of the same strike price and expiration date. It is designed to profit from large movements in either direction in the underlying asset's price.
Both options are based on the same underlying, strike price, and expiration date. The strategy creates a V-shaped payoff, where profits are possible if the asset moves significantly in either direction.
The Straddle strategy is used when a large price movement is expected, but the direction is uncertain.
Assume the stock is trading at ₹17500.
The trader pays premiums for both options. The total premium paid is the cost of entering the strategy.
There is unlimited profit potential on the upside if the price rises significantly and substantial profit on the downside if the price falls significantly.
Max Profit = Unlimited (if price rises) or significant (if price falls)
Occurs when the underlying asset closes exactly at the strike price at expiration. In this case, both options expire worthless.
Max Loss = Total Premium Paid
| Parameter | Description |
|---|---|
| Strategy Type | Volatility-Based / Direction Neutral |
| Number of Legs | 2 |
| Risk | Limited (to total premium) |
| Reward | Unlimited (theoretically) |
| Breakeven Points | Two (upper and lower) |
| Profit Range | Significant movement in either direction |
| Margin Requirement | No margin required for buying options |
| Volatility Impact | Favors high implied volatility |
The payoff diagram of a Straddle strategy forms a V-shape. The maximum loss is limited to the combined premium paid, while profits increase as the price moves significantly away from the strike in either direction.