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What are Options Straddles?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 14 May 2019
  • Copyright Protected:
    2003-2019
    Conjecture Corporation
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Options straddles are investment strategies that allows an investor to create a set of positions with the ability to protect his or her interests no matter how the market moves. Straddles of all types involve the creation of calls and puts that carry the same expiration dates and the same strike prices. The fanciful name for this approach has to do with the fact that the investor is essentially straddling a fence, waiting to see which way the market will move before deciding on which side of the fence to alight.

Creating options straddles that are right for a given scenario is key to making money with this approach. In some instances, a long straddle will present the best opportunity to earn a return. This type of straddle is one of the more common approaches, and calls for buying a call and put with the same strike price and expiration date. There are also short straddle options that call for using an expiration date that is closer to the purchase date, and also require balancing the a call with a put that has the same strike price.

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When it comes to options straddles, the approach does offer several benefits. One of the most obvious has to do with providing investors with options on how to proceed when it becomes clear how a market will move. Should that movement be significant in either direction, all the investor must do is choose whether to use the call or put to best advantage and earn a decent return from the venture. In this sense, the use of any of the several options straddles involves less risk, as the investor has a plan in place no matter which direction the market should take.

At the same time, there is still some amount of risk involved with options straddles. The general approach relies on the market to make a significant amount of movement in one direction or the other. Should the market remain somewhat stagnant or move only a small amount in either direction, there is a good chance that the investor will experience a loss. For this reason, the investor should consider the potential of any option carefully and evaluate all indicators to determine if there is the probability of significant movement before choosing to create the straddle.

While effective, options straddles are not always among the best investment strategies to use in certain situations. This means that before automatically choosing to create some sort of straddle, the investor must consider all relevant information regarding the investment opportunity and develop a realistic projection of what could happen with that investment in the future. Doing so makes it easier to determine if some sort of straddle is a good approach, or if some other strategy would be more likely to benefit the investor in the long run.

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