Series 3: 5.2.1. Straddles

5.2.1. Straddles

A straddle is the purchase or sale of both a call and a put on the same underlying asset or futures contract, at the same strike price and with the same expiration date. Straddles are generally bought at the money. The purchase of a call and put at the same strike price is called a long straddle. The sale of both a call and put at an identical strike is called a short straddle.

Investors tend to buy or sell straddles based on their expectations about the volatility of the underlying product. You might buy a straddle, for example, if you expect the price of a commodity futures contract to be especially volatile. Perhaps adverse weather conditions in Russia have put in question the size of its coming wheat harvest. Or perhaps the threat of a recession in China has increased the uncertainty of metals prices. If you believe a price will fluctuate wildly in the near-t