Straddle – an investment strategy involving the purchase or sale of particular option that allows the holder to profit based on how much the price of the underlying security moves, regardless of the direction of price movement. If a big move is expected in the underlying but the direction is not surely known a straddle is a strategy that can be used in such a case. Both strategies consist of buying an equal number of call and put options with the same expiry date.
An example of a straddle where the owner benefits from a large move in stock price is as follows. An investor purchases an XYZ $100.00 straddle for $3.00 which expires in 2 months. This means that the investor purchased both the call option and the put option each at a cost of $1.50.
If XYZ rallies to $110.00, the investor would have a gain of $10.00. The straddle cost $3.00 in total but the market move of $10.00 allows the investor to benefit from the move with little exposure and profit $7.00. Binary Options can be helpful in the execution of straddles.
