STRADDLE STRATEGY            

A straddle option strategy involves buying both a call option and a put option with the same strike price and expiration date. It's like betting on both sides of a coin toss – you're not sure which way the market will move, but you're hoping for a big move in any direction.

How to work the straddle option strategy?

1. You buy a call option (the right to buy) at a specific strike price and the same expiry.

2. You also buy a put option (the right to sell) at the same strike price and same expiry.

3. Both options have the same expiration date.

Types of straddle option strategies

There are two main types of straddle strategies:

1-Long straddle option strategy

• You buy both a call and a put option.

• You're hoping for a big price move in either direction.

• Your potential profit is unlimited, but your loss is limited to the premium paid.

2-Short straddle option strategy:

• You sell both a call and a put option.

• You're betting that the price won't move much from the range.

• Your potential profit is limited to the premium received, but your loss could be unlimited.

What are the advantages of the straddle option strategy?

1. Potential for profit in both bullish and bearish markets.

2. Can be a good strategy during times of expected high volatility.

3. Limits your risk to the premium paid (for long straddles).

What are the disadvantages of the straddle option strategy?

1. Can be expensive due to buying two options.

2. Requires a significant price move to be profitable.

3. Time decay can work against you if the price doesn't move much.

When to use the straddle option strategy

Straddles can be particularly useful in these situations:

1. Before major events like election event, Fed policy, RBI Policy budget day, or any big news.
2. During periods of market uncertainty or volatility.
3. When you expect volatility but are unsure of the direction.

Let us understand both strategies briefly.

1. LONG STRADDLE STRATEGY

“Long straddle option trading strategy” the direction of the market is not fixed or non-directional market, that market above is going to go up or the market is going to go down, and because of any news the market can go up a lot or go down a lot, then in such a situation long straddle Option trading strategy is used.

Let us understand with the help of the option chain, which strikes to buy and what should be the price?

As shown in the option chain above, there is a strike of Nifty in which Nifty is trading around 23951, which we will call 23950 as “At the money” option, in which the price of 23950CE is ₹248 and put option 23950PE is ₹178 and the expiry of both is also 26th Dec 2024. We have to buy both calls and put options simultaneously to create a position.

Now here, if there is a bullish or bearish trend in the market, then the market movement should be higher, so that there is one option, call or put option. In this, we will get to see profits quickly, if the market easily moves 100 to 200 points up or down in any direction, then we will get to see more profits in any one option and losses will be less. But if there is a movement of 300 to 400 points in the market, then we will see more profits. In long straddle option trading, our maximum loss will be the money we have paid to buy the option, but there is no limit to the profit.
 

(PAID PREMIUM) BUY POSITION = PREMIUM PRICE OF 23950CE ₹248

(PAID PREMIUM) BUY POSITION = PREMIUM PRICE OF 23950PE ₹178

TOTAL PREMIUM = 248+178= 426 (MAXIMUM LOSS POINT)
MAX PROFIT IS UNLIMITED
 

Situation-1  If there is a rise in the market and the market goes above the level of 24100, the more we will see profit in the call option. If the market goes above 24400, then we will see a profit of up to 150-200 points in the call option. But in the put option, we will suffer a loss, if the market goes up on the same day we have created the position, our profit will be in even more points.

For example, If the market closes at the level of 24400 on expiry day, then it will be 24400-23950=450 points, where the price of our call option is ₹248, then we will also get its price. will give a profit of 450-248=202 points from the call option. But the price of the put option complete will become ₹0, due to which we will lose the entire ₹178, so we will subtract this from the profit 202-178=24, Now we will get a total profit of 24 points.

Situation-2  If there is a recession in the market and the market goes below 23950, then we will see the same profit in the put option. If the market goes below 23700, we will see a profit of 150-200 points in the put option, but we will see a loss in the call option. If the market goes down on the same day we have created the position, our profit will be even more in points.

For example, if the market closes at the level of 23500 at expiry, then it will be 23500-23950=450 points. Where the price of our put option is ₹178, then its price will be reduced by 450-178 = 272 and we have also purchased a call option, whose price will become ₹0, so this price will also be reduced from 272. If we give, 272-178=94, then we will get a total profit of 94 points.

Situation-3 If neither a bullish nor a recession is seen in the market, as per our analysis, it does not happen, in which case we may incur a loss. So as our loss is already estimated. That is, the money we have invested in purchasing will be a total loss. Therefore, only 10 to 15% of our total capital should be used in this strategy.

For example, If the market expiry is around ₹23950, then the price of both call and put options will be around ₹0.

If the market expiry is around 24050, the call option price will be ₹95 to ₹100 and we will get 95 to 100 remaining of 248 and the Put option will be a complete loss of 0. 

If the market expiry is around 23850, the put option price will be ₹90 to ₹100. then this position will not be a full loss, but if the price of the call option becomes ₹0, then it will be a complete loss of ₹248.

(To understand this more easily, please read Option Greeks which I have explained very well.)

2. SHORT STRADDLE STRATEGY

When there is no movement in the market at all and the market movement is very slow, then in such a situation short straddle option strategy is used where both a call option and a put option with the same strike price are sold simultaneously. Due to lack of movement in the market, one gets the benefit of “TIME DECAY", due to which the price of both the options gradually decreases, and the lower it is, the more profit the seller of the option. Short the position created in this way  Short Straddle Option Strategy.

As shown in the option chain above, the strike of the Nifty index is. Where Nifty has closed around 23951, in which the level of 23950 is “At the money”, whose call and put option prices are almost the same, in which we have to sell.

The price of the NIFTY 23950CE option is ₹248 and the price of the NIFTY 23950PE option is ₹178.

If both the call options are sold together, the profit made here is limited. The maximum profit we can make by selling the Nifty option at a premium is the same. But if there is a sudden movement or recession in the market, then our loss can be much more than that, meaning the loss is unlimited, if we do not set a stop loss.

(RECEIVED PREMIUM) SELL POSITION = PREMIUM PRICE OF 23950CE ₹248

(RECEIVED PREMIUM) SELL POSITION = PREMIUM PRICE OF 23950PE ₹178

TOTAL RECEIVED PREMIUM = 248+178 =426
TOTAL PROFIT 426 POINT * (LOT SIZE 75)= 31950

TOTAL LOSS = UNLIMITED (if stop-loss is not applied)
 

Situation-1  If there is a rise in the market and the more the market goes above the level of 24150, the more we will see a loss in the call option. If the market goes above 24400, then we will see a loss of up to 200-250 points in the call option. But we will make a profit in a put option. If the market goes up on the same day we have created the position, our loss will be even more in points, if we have not set a stop loss, hence it is very important to set a stop-loss.
 

For example, if the market closes at the level of 24400 at expiry, then it will be 24400-23950 =450 points, where the price of our call option is ₹248, then we will also get its price 450-248=202 points loss from the call option. But the price of the put option Complete It will become ₹0, due to which we will get a full profit of ₹178, then we will subtract this from our loss 202-178=24, Now we will get a total loss of 24 points.
 

Situation-2  If there is a recession in the market and the market goes below 23700, then we will see the same loss in the put option. If the market goes below 23500, we will see a loss of 200-250 points in the put option, but we will make a profit in the call option. But if the market goes down on the same day we have created the position, our loss will be even more in points, if we have not set the stop loss, hence it is very important to set the stop loss.

For example, If the market closes at the level of 23500 at expiry, then it will be 23500-23950=450 points. Where the price of our put option is ₹178, then we will subtract its price from 450-178=272 and we have also purchased a call option, whose price will become ₹0, so this price will also be reduced from 272. Then 272-248=24 then we will have a total loss of 24 points.

Situation-3 If there is neither a bullishness nor a recession in the market, as we had thought based on the analysis, then in case the same happens then we will gain more. So as our advantage is already estimated The money we have invested in selling, Same there will be a benefit. Therefore, this strategy should be used only when the market is not bullish or bearish or it is the day of weekly expiry.

For example, if the market expiry is around 23950, then the price of both call and put options will be around ₹0.

If the market expiry is around 24050, the call option price will be ₹90 to ₹100. As much as we have sold, this position will make a profit of 248-100=148, but if the price of the put option becomes ₹0, then it will be a complete profit of ₹178. Finally, total profit is 178+148=326

If the market expiry is around 17850, the put option price will be ₹90 to ₹100. As much as I have sold, this position will make a profit of 148-100=48, but if the price of the call option becomes ₹ 0, then it will be a total profit of ₹248.

(To understand this more easily, please read Option Greeks which I have explained very well.)
 

In Short straddle, How much capital is required to create a position?

For example, if you sold one lot of call options, then ₹150000-200000 would be required but when you sold a put option, only ₹25000-35000 would be required, so the total here for one lot of calls and put option would be ₹175000-225000 will be required. And also depends on lot size and how many days remain for expiry.