Long straddle | Finance & Capital Markets | Khan Academy | Summary and Q&A

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March 16, 2011
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Khan Academy
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Long straddle | Finance & Capital Markets | Khan Academy

TL;DR

The long straddle options strategy involves buying both a call option and a put option on a stock, profiting from significant price movements in either direction.

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Questions & Answers

Q: What is the long straddle options strategy?

The long straddle options strategy involves purchasing both a call option and a put option on a stock, anticipating a significant price movement in either direction.

Q: How does the strategy work if the stock price decreases?

If the stock price drops, the put option can be exercised, allowing the investor to sell the stock for a higher price than the market value, resulting in a profit. The call option becomes worthless in this scenario.

Q: What happens if the stock price increases?

If the stock price rises, the call option can be exercised, allowing the investor to buy the stock at a lower price and sell it at the higher market value, resulting in a profit. The put option becomes worthless in this scenario.

Q: Are there any risks associated with the long straddle strategy?

Yes, there are risks. If the stock price remains unchanged, both the call and put options expire worthless, resulting in a loss of the initial investment. The strategy is profitable only if there is a significant price movement in either direction.

Summary & Key Takeaways

  • Long straddle options strategy involves buying both a call option and a put option on a stock.

  • If the stock price drops, the put option can be exercised for profit, while the call option becomes worthless.

  • If the stock price rises, the call option can be exercised for profit, while the put option becomes worthless.

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