Explore Your Options  |  JUN 2004

Explore Your Options by Tom Gentile

V. 22:6 (89): Explore Your Options by Tom Gentile STRADDLES How do straddles make money? If the call moves up, doesn’t the put lose just as much? Straddles are a “delta-neutral” strategy. Since straddles are composed of both an at-the-money put and call, the deltas start at zero; hence the term. (Delta is the rate of change in the value of the option for each $1 move in the underlying stock.) If the stock were to move higher, the calls would appreciate and profit, while the puts would depreciate. This works the same way if the stock moves down, but vice versa. This is where the confusion sets in. The profit on a straddle occurs in two ways. One is at expiration, and the second is anytime before then. The only way to profit at expiration is for the stock to move above or below the strike price of the straddle plus the entire debit of the trade.

by Tom Gentile