Straddle

Long Straddle

A Long Straddle is the simultaneous purchase of an ATM Call and an ATM Put, with the same strike price and expiration.

Payoff Diagram:

Direction Assumption: Neutral

Maximum Profit: Unlimited

Maximum Loss: Limited to net debit paid. Maximum Loss occurs when the underlying is at the option strike at expiration, where both the Long Call and Long Put expires worthless.

Breakeven Price: • On the lower end, option strike minus the net debit paid. • On the higher end, option strike plus the net debit paid.

Theta: Passage of Time -> Negative Effect The net effect of time decay is negative.

Volatility: If Volatility decreases -> Negative Effect. If Volatility increases -> Positive Effect. Long Straddles are Vega positive, meaning that if volatility increases, the position gains value. Therefore, Long Straddles are best to be entered when volatility is relatively low.

Short Straddle

A Short Straddle is the simultaneous sale of an ATM Call and an ATM Put, with the same strike price and expiration.

Payoff Diagram:

Direction Assumption: Neutral

Maximum Profit: Limited to net credit received. Maximum Profit occurs when the underlying is at the option strike at expiration, where both the Short Call and Short Put expires worthless.

Maximum Loss: Unlimited

Breakeven Price: • On the lower end, option strike minus the net credit received. • On the higher end, option strike plus the net credit received.

Theta: Passage of Time -> Positive Effect The net effect of time decay is positive.

Volatility: If Volatility decreases -> Positive Effect. If Volatility increases -> Negative Effect. Short Straddles are Vega negative, meaning that if volatility increases, the position loses value. Therefore, Short Straddles are best to be entered when volatility is relatively high.