Straddling Uncertainty
Straddling Uncertainty
Purchasing an equal number of put and call options on the same security at the same time is called straddling. Why straddle? An investor may straddle if he or she feels the security is highly volatile, but is not sure which direction the security’s price will take. Straddling creates a possibility for profit while protecting the investor against volatility risk.
Things To Know
- Straddling means purchasing an equal number of put and call options.
How losses can be limited
A straddle’s potential loss is limited to the difference between the strike price of the call and that of the put. For example, if an investor buys an October 90 call for 5 and an October 90 put for 3, the maximum possible loss is 8. If the stock closes above 98, the investor makes a profit even though the put expires worthless. If the stock closes below 82, the investor also makes a profit, although the call is worthless. If it closes at any price between 82 and 98, the investor suffers a partial loss.