Explain how to build an long straddle what are the purposes

Explain how to build an long straddle, what are the purposes of an long straddle strategy? Build a real life long straddle for a stock of your choice, pull the options contracts and paste them on the answer. Please explain each part of it, what the credit or debit will be for the transaction, include every detail of each option contract you will use to build the long straddle trade.

Solution

A straddle basically means an option startegy where the investor hold both Call and Put options with the same exercise price and expirtaion date. This strategy is more useful when the investor thinks that the price of the stock may move significantly but unable to predict in which direction it will be. In other words a small movement in the price of the stock may lead a loss to the investor. As result of this we can say its etremely risky.

We can take this example:

Suppose a call option on stock with an exercise price of 70 is available for 6 and a put option for the same stock is available with the same strike price for 8.

Now we are going to buy a call and put options. See the table below

Here S = Stock price

   E = Exercise price

Or otherwise we can say that

From the table we can conclude that the investor is making profits when there is a significant movement in the stock price