Financial Glossary: Straddle


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Straddle

Straddle

An options strategy with which the investor holds a Position in both a call and put with the same Strike Price and Expiration Date.

In finance, a Straddle is an investment strategy involving the purchase or sale of particular Option derivatives that allows the Holder to profit based on how much the price of the Underlying Security moves, regardless of the direction of price movement. The purchase of particular Option derivatives is known as a Long Straddle, while the sale of the Option derivatives is known as a Short Straddle.

Straddles are a good strategy to pursue if an investor believes that a stock's price Will move significantly, but not sure of its direction. The stock price must move significantly if the investor is to make a profit. If only a small movement in price occur in either direction, the investor Will experience a loss. As a result, a Straddle is extremely risky to perform. Additionally, on stocks that are expected to jump, the market tends to price options at a higher Premium, which ultimately reduces the expected payoff should the stock move significantly.

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