Straddle: A straddle is hedging strategy that involves buying or selling a put and a call option on the same underlying instrument at the same strike price and with the same expiration date. If you buy a straddle, you expect the price of the underlying to move significantly, but you’re not sure whether it will go up or down. If you sell a straddle, you hope that the underlying price remains stable at the strike price. Your risk in buying a straddle is limited to the premium you pay. As a seller, your risk is much higher because if the price of the underlying security moves significantly, you may be assigned at exercise to purchase or sell the underlying security at a potential loss. Similarly, if you choose to buy offsetting contracts when the prices move, it may cost you more than the premium you collected.

 

Related Words

Straddle: A straddle is hedging strategy that involves buying or selling a put and a call option on the same underlying instrument at the same strike price and with the same expiration date. If you bu . . . View Full Definition

Short Straddle: When a lack of supply tends to force prices upward. In particular, when prices of a stock or commodity futures contracts start to move up sharply and many traders with short positions are fo . . . View Full Definition

Long Straddle: Taking a long position in both a put and a call option.

Spread (Or Straddle): The purchase of a futures contract of one delivery month against the sale of another futures delivery month of the same commodity: the purchase of one delivery month of one commodity against . . . View Full Definition