Long Straddle
Categories: Derivatives, Trading
A four-day mule ride into the Grand Canyon? An exhausting experience with Viagra?
Nope...it’s an options strategy.
GloboMediCure has its experimental cancer drug up for FDA review. If it gets regulatory approval, the stock will skyrocket. If it gets a thumbs down, the share price will plummet.
Either way, a big move is on the way. But which direction? Rather than guess, set up a straddle.
The strategy takes advantage of a large move in either direction. It's a bet on volatility in general, without picking a direction.
To set up a long straddle, you buy both a call and a put, with the same strike price and the same expiration. A call is a bet that the stock will go up. A put is a bet that it will go down. Now you're covered whichever direction the stock goes. The only cost is the price of purchasing the options.
GloboMediCure is currently trading at $20. You set up a straddle with that strike price. So you have a call and a put, both with strike prices of $20, both expiring in a month (right after the FDA announcement). The call and the put each cost $2, so you're in for $4 total. If the stock rises above $24 or falls below $16, you make money. Which is, uh...what you're trying to do.