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Straddle Techniques

While the spread involves variation of strike price, expiration date, or both, the straddle by definition requires that strike price and expiration are the same. To open a straddle, you buy an equal number of calls and puts (a long straddle) or sell an equal number of calls and puts (a short straddle); in either case, the option positions would have the same strike price and expiration date.

With a long straddle, you experience a loss in the middle range, represented by a point spread on either side of the strike price, and profits either above or below that range. For example, if the total cost of opening a long spread is 11 ($1,100), then the stock must move either up or down by 11 points for you to break even. Anything beyond that range is profitable, and if the stock's price remains within the 11-point range until expiration, the position becomes an overall loss. You can close one side of the position without closing the other. For example, if the price of the underlying stock moved up enough points to make the calls profitable, they could be closed, and the puts left open. The same argument is true on the downside. Puts could be closed and calls left open. In writing a long straddle, the best possible outcome would be price movement in both directions, enough so that each side can be profitable in turn. The long straddle is highly speculative.


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