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Straddles

The straddle is one of the most common combinations and consists of a long position in a call and a long position in a put on the same underlying asset and having the same strike price K and maturity T.

 

The straddle constitutes an interesting strategy for an investor who expects a volatile and large move in the price of the underlying asset, although the direction of this move is unknown. The premium paid for creating a straddle is equal to:


Also, put–call parity says that you can enter into a straddle by buying a call and a put, or two calls and sell a stock or two puts and buy the stock. A straddle is very sensitive to volatility. Indeed, the Gamma and Vega of a straddle are positive and two times higher than the Gamma and Vega of a call. The holder of a straddle is obviously long volatility. At the money the Delta of the straddle is not exactly zero, but close depending on the underlying’s forward since the put and the call deltas cancel each other.

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