Ask the Institute

DATE: July 08, 2013

QUESTION:

Can you describe the intricacies of the long 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. One way to trade a straddle is to buy both options, which is called a "long" or purchased straddle. If a trader has a forecast that some pending announcement will cause the stock price to make a big price change, but is unsure if the change will be up or down, then buying a straddle may be a logical decision. To learn more about the long straddle strategy, view this week's segment of "Ask the Institute."