Trading Options - Long Straddle

If you are sure about a big move in Market but not sure about the direction, straddle and strangle are two options strategies that are tailor made for you. Both strategies consist of buying an equal number of call and put options with the same expiration date. There is slight difference between the two though.

First let us understand Straddle.

In this case, you just buy a Call Option and a Put Option for same Strike Price and same Expiry. Continuing from previous two posts, let’s say you buy 5000 Call and 5000 Put for 100 Rs Premium each and lot size is off course 50 (You pay 5000 + 5000 = 10000 Premium). Now when the budget is announced, market reacts sharply either in positive or negative direction with a big move. Following graph shows your Profit/Loss with respect to NIFTY level. Please note that, in this case too we are assuming that you continue to hold both the positions till expiry date. Usually you don’t do that and hence either your losses are much less and your profits are little higher. We will explain that too in some other post.

So basically, 4800-5200 is the range where you do not earn money. When NIFTY moves beyond this range then you start making money. E.g. At NIFTY of 5100 you recover 100 Rs premium through you call option but still you have lost your 100 Rs premium of put. When NIFTY moves beyond 5200 then both your premiums have been recovered and you start counting your blessings.

Please try to understand that this strategy is very useful when there is some big move in the market. In a sideways market, you are more likely to lose your premium and hence it must be used only in strongly trending or news based market. Moreover, when there is expected to be a big move, option premiums tend to increase so your overall profit is affected to some extent. Try checking Infosys option chain premiums near their result date.

One more thing, buying straddle here is referred as Long Straddle. You can also sell straddle and there is no price for guessing its name as Short Straddle. We will discuss about it when we get to selling options.

For other scenarios, we always have Strangle. You will have to wait till next post though…