Chapter 06 · Section 6.1
Straddles in a Volatile Market Outlook
Volatile market trading strategies are appropriate when the trader believes the market will move but does not have an opinion on the direction of movement of the market. As long as there is significant movement upwards or downwards, these strategies offer profit opportunities. A trader need not be bullish or bearish. He must simply be of the opinion that the market is volatile. This market outlook is also referred to as "neutral volatility".
- A straddle is the simultaneous purchase (or sale) of two identical options, one a call and the other a put.
- To "buy a straddle" is to purchase a call and a put with the same exercise price and expiration date.
- To "sell a straddle" is the opposite: the trader sells a call and a put with the same exercise price and expiration date.