Important notice
The information on this web site is provided solely for general education and information purposes and therefore should not be considered complete, precise, or current. Trading in stocks and options involves risk. You can lose money. You should always seek professional advice from your stock broker. We are not stockbrokers and do not make recommendations to buy or sell any stock or option. We provide educational information for your evaluation.

Return to Option Strategies

A long straddle position is when we purchase the same number of Option contracts at the same strike price and the same expiration date.

This is a great strategy to use before expected news, like earnings, where we can take advantage of any major moves the stock may have.

Because we are buying and not writing these options we do need a stock that is volatile. If there is no significant movement, we have the potential to lose all of our investment.

In this strategy one must consider the time that would take for the XYZ stock to go some where; this will help us decide if we should buy these positions on the money or out of the money.

Example: XYZ Stock trading at 33.00

• Buy the April Call Options 35.00 strike price at 0.75
• Buy the April Put Options 30.00 strike price at 0.65
• A debit of 0.75 + 0.65 = 1.40
• Each option contract is equal to 100 shares.
• Maximum risk 1.40 X 100 = 140.00

The trade can be profitable if the XYZ stock climbs over the 35.00 strike price or drops bellow the 30.00 strike price.

As a stock moves more in the money the delta increases making the option in the money worth much more, as the Stock moves more out of the money the delta decreases allowing the option not to lose as much value, as the one in the money increases in value faster.

A Call option that is in the money can have a delta of 90, meaning that for every dollar the stock goes up 0.90 would be added to your option value, conversely a Call option that is out of the money for every dollar the stock goes up the delta could be only 30, meaning that for every dollar the stock moves up your option would increase by 0.30 Using the above delta explanation we can see if either the Call or Put goes in the money the other would be out of the money.

Deltas do increase and decrease on value according to the movement od the stock.