Long straddle

CFA Level III Derivatives
#1

Hi,

Understand long straddle strategy involves long calls and puts with same strike price and expiration.
Qns: Given a choice, do we long the strike price of the calls and puts to be ATM or OTM?

Thanks

#2

Straddle - ATM
Strangle - OTM

3 Likes
#3

In a straddle you’re doing a pure volatility play. You generally are not trying to save money on premiums by buying OTM options - plus consider that in a straddle your strike price is the same for your “call” and “put” side. If you’re doing calls and puts at the same strike price… and you are trying to do OTM… it means you for example have a stock market price of 50 dollars and you’re buying calls and puts with a strike price of 60 dollars. This is not a pure volatility play. Your puts are in the money already. Same if you have a combined strike price of 40 dollars. Your calls are in the money already. Neither is a pure volatility play in that case.

Cheers - good luck - you got this :+1:

1 Like
#4

Thanks a lot guys!
It’s v helpful. Much appreciated!