Straddle

In finance, a straddle strategy involves two transactions in options on the same underlying, with opposite positions.

A straddle involves buying a call and put with same strike price and expiration date.

Thus, an investor may take a long straddle position if he thinks the market is more volatile than option prices suggest, but does not know in which direction it is going to move.

A short straddle is a non-directional options trading strategy that involves simultaneously selling a put and a call of the same underlying security, strike price and expiration date.

A maximum profit upon expiration is achieved if the underlying security trades exactly at the strike price of the straddle.

The risk to a holder of a short straddle position is unlimited due to the sale of the call and the put options which expose the investor to unlimited losses (on the call) or losses limited to the strike price (on the put), whereas maximum profit is limited to the premium gained by the initial sale of the options.

Losses from a short straddle trade placed by Nick Leeson were a key part of the collapse of Barings Bank.