Straddle strategy is an options trading strategy in which the trader buys both a call option as well as a put option of the same underlying asset or stock having the same expiry date and strike price.
Usually, traders use the straddle strategy when they are sure of a significant movement of the underlying stock’s price, but are unsure of the direction, i.e. whether the price will rise or fall significantly.
Thus, in this strategy, the trader will make a profit when the price or the underlying stock rises or falls by an amount that is more than the premium paid to buy call and put options.
The profit potential is unlimited as long as the price of the underlying stock moves significantly in either direction.
For example, consider a stock whose price is Rs. 10.
The trader is expecting a significant movement in the stock’s price within 15 days post its result on 1st February.
But, he/she is not sure if the market will take the result positively or negatively.
So, the trader goes for a straddle strategy, i.e., he/she buys call options and put options with expiry of 15th February and bets the price to rise above Rs. 12 or fall below Rs. 8.
Thus, in this way he/she will make a profit on any movement of the stock price beyond Rs. 2.
Looking at a straddle, a trader can know two things about the sentiment of the options market towards a particular stock. The first is that the market is expecting volatility in the price of the stock, and the second is the expected trading range of the stock’s price.
You can easily try this strategy on PHI 1 as shown below:
Step 1:
Open the Option Leg Builder on PHI 1.
Step 2:
Select the index or stock whose options you want to trade.
Voila! You have created the straddle strategy with the payoff chart.
You can save this strategy for the future as a template by clicking ‘Save strategy’.
Now, prior to deployment you may want to perform backtesting for your options strategies. You can avail free options backtesting with PHI 1.
You can also deploy your options strategy easily when your predefined criteria are met. This means no more staying glued to the screens for the right trading opportunity to come!
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Watch our demo of how to test straddle strategy using PHI 1’s Options Trading feature: Watch Now!
Originally published at https://blog.phi1.io on November 12, 2021.
