Long Straddle Option Strategy: Explanation and Tactics

What is the Long Straddle Strategy, and how can you use this strategy to profit from the crypto options market?

What is Long Straddle Options Strategy?

If you are sure a crypto asset will greatly respond to a piece of news or information, or you have other reasons to believe there will be a substantial change in an asset’s price, you can use the long straddle options strategy. This strategy is simple and does not streamline the asset’s price to one direction for profits to be made.

How Long Straddle Options Strategy Work?

There are a few criteria that give the straddle meaning. Some of the key points include:

1. Outlook

There must be a certainty of a gap up or down, likely through the breakout of major news. 

2. Strategy

After ascertaining the certainty of the market movement, the next thing is to buy both a call and put option. The major criteria include the following:

1. They must be of the same asset

2. They must have the same strike price

3. They must expire on the same day.

3. Maximum loss\risk

The most you can lose from trading long straddle options strategy is the premium paid for both contracts. This happens when both contracts expire out of money.

4. Profit

Theoretically, the potential for profits from this strategy is limitless, especially when the asset’s price goes up. 

5. Breakeven price expiration

Since there are two main options, the breakeven price can either be one of two prices. 

● Lower Breakeven = Put Strike Price – Net Premium

● Upper breakeven = Call Strike Price + Net Premium

6. Payoff diagram

Below is a diagram that shows the profit and loss potential of the long-straddle strategy.

Advantages of Long Straddle

1. The losses are capped. 

2. The break-even prices are closer than many other strategies. 

Drawbacks of Long Straddle

1. The premium paid differs, and one might need a stronger directional movement to profit from one of them. 

FAQ:

What is the difference between long and short straddles?

The Long straddle comes with limited risk and unlimited rewards; the short straddle, on the other hand, is the direct opposite, with limited rewards and potential for unlimited loss.

What is a Straddle Example?

Here is an example that explains the execution of a long straddle and the eventual strategy payoff Images like this can be seen on the Deribit or Redot options page. At the time of this writing, Bitcoin is trading at $19,200. A trader can buy a call option at $19,500 for $318, and a put option at the same strike price for $134.98.

The breakeven price is:

1. Lower breakeven: $19,500 - $452.98 = $19,047

2. Upper breakeven: $19,500 + $452.98 = $19,958.98

Scenario 1 – Market expires at $19,047 (lower breakeven)

No gain or loss: Profit made equals premium paid. 

Scenario 2: Market expires at $19,958 (upper breakeven)

Like the first scenario, the options trader is neither in profits nor losses. Profit made equals premium paid. 

Scenario 3: Market expires at $19,500

If the market expires at the stroke price, the trader loses both premiums paid for the call and put options. 

Scenario 4: The market ends at $18,500

The call option expires worthless but the put option expires in the money. The trader makes a profit of $547.

Scenario 5: The market ends at $21,000

The put option expires worthless, and the call option expires in the money. The trader makes a $1,041 profit. 

How Do You Earn a Profit in a Straddle?

You earn a profit when the asset moves past your breakeven point in either direction.

Conclusion:

We sincerely hope that you learned something from this blog and that you will make the most of it in real life.