Ask the Institute

Ask the Institute Archive

DATE: June 24, 2013

QUESTION:

Can you describe the intricacies of the short straddle and why a trader may choose to execute this strategy?

ANSWER:
A straddle is a two-part strategy involving one call option and one put option. Both the call option and the put option will have the same strike price, the same expiration date, and the same underlying stock or index. There are two ways to trade a straddle. A trader can either buy both options, which is called a long straddle, or, sell both options, which is called a short straddle. If a trader is forecasting that a specific stock's price will trade in a narrow range, then selling a straddle may be a logical choice for this trader's market outlook. To learn more about the short straddle strategy, view this week's segment of "Ask the Institute."

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