The Straddle Option Spread

Outlook: High Stock Volatility

     When you setup a straddle option position you are going long volatility, which means you are betting that the underlying asset will shift significantly by the time the options expire.  The beauty of the straddle position is that the underlying equity can either go significantly up or significantly down, and you will make money either way.  You lose money if the underlying equity doesn't fluctuate that much.

     To setup a straddle, you go long (buy) an equal amount of call options and put options with the same strike price.  That way if the underlying equity goes way up, the put options expire worthless and you make a profit on the call.  If the underlying equity goes way down, the call options expire worthless and you profit on the put options.  In order for you to profit, the underlying equity has to go up or down by an amount greater than the price your paid for both the call and the put.  In order word, you have to cover your cost for both the call and the put to break even.