The Complete Book of Option Spreads and Combinations: Strategies for Income Generation, Directional Moves, and Risk Reduction, + Website

CHAPTER 7

Straddles

A straddle isn’t an option spread; rather it’s an option combination. It’s a combination of options because a straddle buys both a call and a put with the same strike price and expiration or sells both a call and a put with the same strike price and expiration. The strike price is usually the strike price nearest to at-the-money.

If you thought that a stock was going to experience a big move you’d buy options to take advantage of that move. If you thought the move was going to be upward you’d buy call options. If you thought the move was going to be downward you’d buy put options. What if you knew there was a big catalyst imminent such as an earnings release, court verdict, or Food and Drug Administration decision and you thought the catalyst would result in a big move, but you didn’t know in which direction? You could buy both a call and a put. That is a long straddle.

If you thought a stock was not going to move very much, then you might sell options. You could sell a put and collect, and ultimately keep, most or all of the premium received when the put option expired as long as the stock didn’t drop too much. You could sell a call and collect, and ultimately keep, most or all of the premium received when the call option expired as long as the stock didn’t rally too much. Or you could sell both a call and a put and keep most of the premium received as long as the stock didn’t move too much in either direction. It would be tough to keep absolutely all of ...