Stock market traders opt for various types of strategies to book profits on their trades. Out of the various trading strategies available, the straddle strategy is known for its minimum risk and better chances of generating profits irrespective of the market movement. The straddle strategy is used for options trading where a trader opts for a single sport and call option at a similar strike price with the same expiry date. The trader generates profit from this strategy without thinking about the direction in which the overall market moves.
Benefiting from the market volatility, the straddle strategy can be understood through the following points.
- The first step in the straddle strategy is to place a buy order for a call option. With the call option purchase order, the investigator books the right to buy the asset at the site price without any kind of application. At this juncture, if the asset prices increase, the trader generates a profit through an increase in the asset’s price above the strike price.
- While placing the buy option, the trader Sam intensely places a buy order for the put option. This way, the traders even book the right to sell the asset at the strike price. Moreover, if the price of the underlying asset falls, the trader makes a profit as well.
- The only requirement for the straddle strategy is that the trader must place the put and call options at the same time with the same expectation date and strike price. This helps the trader maximize his chances of earning profits without worrying about market volatility or the direction in which the underlying asset price moves.
Moreover, the straddle strategy can be divided into two types:
Long straddle
The Long straddle strategy is based upon market volatility and helps the trader to generate profit from placing a buy option for both put and call without worrying about the direction of the market.
Short straddle
The short straddle strategy on the other hand requires traders to place a sell order for put and call at the same strike price and expiration date. The short straddle strategy on the other hand does not depend upon market volatility and helps the trader earn profits through underlying assets price stability.
Benefits of Straddle Strategy
The following points can help traders understand the benefits of the straddle strategy in stock market trading:
Market neutral strategy
The straddle strategy is a market-neutral strategy that involves a limited risk. The trader generates profit through a change in the underlying asset price without worrying about its direction. The trader does not have to identify the price movement. The only thing that matters is volatility in the underlying assets price which can help them in strategy application and earning profits.
Limited risk
The straddle strategy helps with minimizing of trading risk which is limited to the premium paid for put and call options. Through the identification of market volatility, traders can generate unlimited profits.
Protection from market changes
Traders by opting for the straddle strategy can protect themselves from unwanted market changes and price activations. Using the price volatility, investors can protect their investments and thereby even increase their chances of earning better returns.
Conclusion
The straddle strategy is known for its low-risk and high profit-generating feature which makes it one of the most opted strategies by experienced traders using a stock trading app. However, investors must take complete precautions and opt for complete market research before using the straddle strategy.