Long Straddle vs Short Straddle

Long straddles and short straddles are both strategies to profit from arranging two options contracts--a put and a call--on the same security with the same strike date. This is the only area where the two are similar, however. As implied in the name, the short straddle is a short-term option contract by which the investor issues two opposing contracts. The sales are profitable as long as the trades are not executed. In a long straddle, the investor purchases two contracts, one call and one put, with the same strike price and date with a long position.

Benefits of a Short Straddle 

When the market is not moving, there are few opportunities to generate a quick profit. One chance to do so is by selling options contracts, and a short straddle allows you to sell two. An investor can quickly turn a profit of several thousand dollars just by selling these contracts. As long as the market does not begin moving, the contracts will not be executed, and the investor will walk away with the handsome profit after very little work. 

Risks of a Short Straddle

The problem with a short straddle is, if the market does move, the issuer of the options contracts may be forced to buy or sell actual shares. This can result in a quick and tremendous loss for an investor. For example, Stock A is currently listed at $10. John issues a short straddle that results in two options contracts, a put and a call, for 100 shares at $5. He charges $1,000 for the transaction and believes the market will not hit $5. It does. The investor executes the option, and John must sell $500 worth of Stock A. If he purchased Stock A at a price higher than $5, he loses on the trade.

Benefits of a Long Straddle

A long straddle involves a different strategy altogether. In a long straddle, John buys a put and a call contract for Stock A that expires in 1 year for a strike price of $25. He is hoping the market moves, but he does not care if it moves up or down. If the price of Stock A rises, John will execute his call option; if it drops, he will execute his put option. He will make money either way, and he will simply allow the other option to expire. 

Risks of a Long Straddle

If the market does not move up or down, John loses money when the contracts expire and are not executed. He simply has to walk away, surrendering the money he paid in order to purchase the options contracts in the first place. For this reason, a long straddle is a good option in a fairly volatile market. As long as the market remains volatile and continues to move, in either direction, John will do well. The second the volatile market straightens out and prices stabilize, the value of John's contracts will drop dramatically.

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