A Long Straddle involves buying a call option and a put option at the same strike price and expiry. It profits from significant price movement in either direction.
- Ideal for high-volatility conditions, where a large price move is expected but direction is uncertain.
- Buying ATM options maximizes sensitivity to price changes.
- Risk is limited to the combined premium paid for the options.
- Profits are unlimited if the price moves significantly beyond breakeven points.
Example:
- NIFTY trading at 18,000.
- Buy 18,000 Call at ₹200 and 18,000 Put at ₹150 (lot size = 50).
- Outcome:
- If NIFTY rises to 18,400 at expiry:
- Call gain = ₹200 × 50 = ₹10,000.
- Put expires worthless.
- Net profit = ₹10,000 − ₹17,500 = ₹2,500.
- If NIFTY falls to 17,600 at expiry:
- Put gain = ₹200 × 50 = ₹10,000.
- Call expires worthless.
- Net profit = ₹10,000 − ₹17,500 = ₹2,500.
- If NIFTY stays at 18,000:
- Both options expire worthless.
- Net loss = ₹17,500.
- If NIFTY rises to 18,400 at expiry: