Long Straddle trading strategy consists of one call and one put option positions at the same time. Here the trader buys one call and put option at the same strike price (say X) and same premium. Call option premium C will be same as put option premium P.
X = USD 100; C = USD 10; P = USD 10
Current Share Price, S0 = USD 80
Total Premium Paid = USD (10 + 10) = USD 20
Maximum Loss happens when both the options are expired and this happens at the stock price of USD 100. The maximum loss will be equal to the total premium paid which is USD 20.
Maximum Profit will be unlimited as the market moves in any direction. The profit payout can be easily understood from the below payout diagram.
Breakeven price is the share price where the profit stood at 0 and it separates profit from loss. There will be two breakeven prices here, one is USD 120 and another is 80 USD. At these prices, the loss from total premium paid will be recovered from any one option. The breakeven price can easily be determined from the table and the chart.
The following table shows the profit/loss scenarios for different share prices.
The below chart shows the profit/loss for the trading strategy option with the movement of the share price.
Here we have three graphs
Long Straddle trading strategy is used when the trader is bullish on volatility but is unsure of market direction. A long straddle is an excellent strategy to use when you think the market is going to move but don’t know which way. But, the market must move enough in either direction to cover the cost of buying both options. Buying straddles is best when you expect the market to make a substantial move before the expiration date – for example, before an earnings announcement.