Option Straddle Plays

An option straddle play refers to a play in which you are anticipating a stock to make a big move, but you do not necessarily care which direction the stock moves.

To set up this spread you buy 1 at the money call option and you also buy 1 at the money put option.

Max Profit

An option straddle play has an unlimited profit potential as long as the stock moves far enough.

If the stock moves up the value of the call option will go up and the value of the put option will go down. To make money you need the stock to go up far enough where the call goes up more than the put goes down.

The opposite is true for the down side. As stocks go down the put option goes up and the call option goes down. To be profitable here the stock needs to go down far enough where the put option goes up more than the call goes down.

In other words if the stock moves big in any direction you stand to make money.

Max Loss

The most you can possibly lose is the amount you paid for both options. So if you paid $5 for the call and $5 for the put your max loss is $10. It is however unlikely that you will receive your max loss.

Unless your stock stays at the money and you let your option expire worthless you will be able to make some of it back.

Probabilities

This is a low probability trade so if you use a straddle option spread it should be on only a small amount of your portfolio.