A straddle is an options strategy in which both a put option and a call option are purchased with the same strike price and the same expiration date.
It is a neutral options strategy that offers profit potential in the event that the price of the underlying cryptocurrency — in our case — moves dramatically in either direction from the strike price, negating the premium paid by the buyer. Failure to offset the total premium leads to a loss.
To put it simply, a straddle is primarily used when a trader expects a major price move in the near future — but can’t decide on which direction. They, therefore, are looking to profit simply on a volatile move (in either direction) taking place.
A straddle is implemented through two transactions involving the same cryptocurrency that offset each other, with the premium paid representing the cost to execute the strategy. Profit potential in this setup is theoretically very high and dependent on how significant an impending price move eventually is.
- A large price increase or decrease equates to larger profits.
- A small price increase or decrease may equate to minimal profits or a loss.
- A negligible price increase or decrease is the worst-case scenario.
Setting up a straddle
Setting up a straddle is not particularly complicated.
First, an options trader must calculate the cost of creating the neutral strategy by finding the sum of an equivalent put and call.
Once the price premium is determined, the trader may calculate what percentage rise or fall a cryptocurrency price must experience to create a profit.
The premium paid also determines the expected trading range for the coin or token in question. If an altcoin costs $100 and the premium paid is $10, the predicted trading range would thus be between $90 and $110 — meaning the price must leave this range in order to create a profitable straddle.