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The Long Straddle strategy allows the trader to profit from expectations regarding upcoming high volatility in a currency pair. This strategy requires the purchase of an at-the-money (ATM) Call and Put. However the strategy involves high premium costs, so in order for the trader to be able to make a profit, the currency pair must be very volatile.
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When to do it
This strategy works best when the trader thinks that the pair will be very volatile in the near future.
The set-up
Maximum potential profit
The maximum potential profit is unlimited.
Maximum potential loss
The maximum potential loss is limited to the premium paid.
Time impact
In the Long Straddle strategy, time decay works strongly against the trader. As time goes by, the value of both options decreases.
Best/worst case scenario
The best case scenario occurs when the pair’s price increases or decreases by a huge amount.
The worst case scenario occurs when the pair’s price does not change by the amount required to start making profit.
Tips
The Long Straddle works well when major events that are expected to highly increase volatility will occur in the near future. This anticipation enables the trader to create a Long Straddle in a limited time period and thus limit the premium costs. Doubling the amount spent on either the Put or the Call will mean that the trader still expects high volatility but has an expectation on the direction the pair will move. Implementing this expectation to the Straddle, it changes its name to “Strip” if the expectation is bearish and “Strap” if the expectation is bullish.
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When to do it
This strategy works best when the trader thinks that the pair will be very volatile in the near future.
The set-up
- Buy an ATM Call at strike price A (spot +0 )
- Buy an ATM Put at strike price A (spot +0 )
- At the time of creating this strategy, the pair’s price will be at A.
Maximum potential profit
The maximum potential profit is unlimited.
Maximum potential loss
The maximum potential loss is limited to the premium paid.
Time impact
In the Long Straddle strategy, time decay works strongly against the trader. As time goes by, the value of both options decreases.
Best/worst case scenario
The best case scenario occurs when the pair’s price increases or decreases by a huge amount.
The worst case scenario occurs when the pair’s price does not change by the amount required to start making profit.
Tips
The Long Straddle works well when major events that are expected to highly increase volatility will occur in the near future. This anticipation enables the trader to create a Long Straddle in a limited time period and thus limit the premium costs. Doubling the amount spent on either the Put or the Call will mean that the trader still expects high volatility but has an expectation on the direction the pair will move. Implementing this expectation to the Straddle, it changes its name to “Strip” if the expectation is bearish and “Strap” if the expectation is bullish.
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