A straddle is an options strategy involving both a call and put option with the same strike price and expiration date. The two options contracts act like two legs straddling the current asset price on either side. The two corresponding transactions offset one another; thus, it is best to use it when you expect a significant price movement in BTC yet are unsure whether the price will increase or decrease.
It’s a profitable strategy when BTC rises or falls from the strike price by more than the total premium paid.
A straddle provides us with two helpful indicators of what the options market thinks about BTC’s movement: The first indicator is the expected volatility (what the market expects from BTC), and the second is the expected trading range of BTC by the expiration date.
Small price movements won’t generally be enough for you to make a profit from a long straddle. If you think BTC will soon be undergoing volatility and move outside the trading range, whether the price goes up or down, you can use a long straddle options strategy to profit from a large move in price. To do this, you buy an ATM call, and an ATM put with the same expiration date and same strike price.
The maximum loss can only be the premiums you paid, but with a significant move in asset price on either side, you can continue to make a profit. The larger the movement, the bigger the potential payoff. View the payoff graph below to help understand.
Want to learn other Options Strategies check out our PowerKnowledge article on Strangles.
Disclaimer: This is not financial advice. The features described in this article and the information provided does not constitute investment advice.
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