Until now, you have had lessons in Calls and Puts. When you combine trading a Call and a Put together, you are trading an options strategy.
An options strategy is when you execute more than one option at the same time; buying and selling Calls and Puts in different combinations to take advantage of market moves in many different ways.
This lesson will focus on a specific strategy, a Long Straddle.
The long straddle is commonly used over news announcements and major economic events to trade an increase in volatility. WTI Oil is known for its market volatility (even without news announcements), thus you buy a Call and Put together in a strategy with the expectation that volatility will increase.
To execute this strategy, you buy a Put and Call at the same time with the same strike, expiry, and amount. This results in a profit if the market moves in either direction beyond the premium paid for both options; the Put option will bring a profit if the market falls and the Call option will bring a profit if the market rises.
WTI OIL Long Straddle example:
The above image is an at-the-money WTI OIL Long Straddle where both the Call and Put are set with strike rates equal to the underlying market (0%) at execution. The strike rates do not have to be at 0%, but they do have to be the same.
The chart below shows the strategies’ profit or loss at expiry over a range of market rates. The dotted grey line highlights when profit/loss equals zero (the break-even point). Anything above the grey line is a profit and anything below it is a loss. The letter 'A' indicates the strike rate. If the market moves far enough in either direction past the break-even points, the strategy is profitable. But if the market rate does not break-out in either direction, the strategy creates a loss. This ‘V’ shaped chart is a classic Long Straddle strategy.
Advantage:
- Your maximum loss is limited to the premium paid at open
- You will not get stopped-out
- You can profit from a move in either direction.
Disadvantages:
- It involves a higher premium cost compared with trading in one direction because you are buying two options
- As time passes and the options get closer to expiry, time value is against you since both legs are decaying
Below is an actual scenario chart and table from the ORE Web-platform, optionsReasy. It shows the payout from a long straddle in WTI Oil, you can see you will profit as long as the market moves in either direction:
The chart below shows the strategies present payout (before expiry). Notice how the payout is higher than the payout at expiry. When you buy an option, or multiple options, you ideally want the market to move sooner, so you can cash-in before expiry and not suffer time decay.
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Editors’ Picks
EUR/USD flirts with daily highs, retargets 1.1900
EUR/USD regains upside traction, returning to the 1.1880 zone and refocusing its attention to the key 1.1900 barrier. The pair’s slight gains comes against the backdrop of a humble decline in the US Dollar as investors continue to assess the latest US CPI readings and the potential Fed’s rate path.
GBP/USD remains well bid around 1.3650
GBP/USD maintains its upside momentum in place, hovering around daily highs near 1.3650 and setting aside part of the recent three-day drop. Cable’s improved sentiment comes on the back of the Greenback’s irresolute price action, while recent hawkish comments from the BoE’s Pill also collaborate with the uptick.
USD/JPY retakes 153.00 after Japan's weak Q4 GDP print
USD/JPY kicks off the new week on a positive note as Japan's weak Q4 GDP growth tempers bets for an immediate BoJ rate hike and undermines the Japanese Yen. Investors, however, seem convinced that the BoJ will stick to its policy normalization path amid hopes that PM Takaichi's policies will boost the Japanese economy. In contrast, cooling US consumer inflation reaffirmed bets for more Fed rate cuts in 2026, which acts as a headwind for the US Dollar and should cap the currency pair.
Editors’ Picks
AUD/USD remains close to three-year top amid the Fed-RBA divergence
AUD/USD attracts some dip-buyers near mid-0.7000s during the Asian session on Monday, stalling last week's modest pullback from a three-year peak. The US Dollar continues with its struggle to attract any meaningful buyers amid bets for further rate cuts by the Fed, bolstered by the softer US CPI report on Friday. In contrast, the Australian Dollar retains a bullish bias on the back of the RBA's hawkish stance, which further acts as a tailwind for the currency pair.
USD/JPY retakes 153.00 after Japan's weak Q4 GDP print
USD/JPY kicks off the new week on a positive note as Japan's weak Q4 GDP growth tempers bets for an immediate BoJ rate hike and undermines the Japanese Yen. Investors, however, seem convinced that the BoJ will stick to its policy normalization path amid hopes that PM Takaichi's policies will boost the Japanese economy. In contrast, cooling US consumer inflation reaffirmed bets for more Fed rate cuts in 2026, which acts as a headwind for the US Dollar and should cap the currency pair.
Gold holds above $5,000 as bears seem hesitant amid Fed rate cut bets
Gold edges lower at the start of a new week, though it defends the $5,000 psychological mark through the Asian session. The underlying bullish sentiment is seen acting as a headwind for the bullion. However, bets for more rate cuts by the Fed, bolstered by Friday's softer US CPI, keep the US Dollar bulls on the defensive and continue to support the non-yielding yellow metal as the focus now shifts to FOMC Minutes on Wednesday.
Week ahead: Data blitz, Fed Minutes and RBNZ decision in the spotlight
The US jobs report for January, which was delayed slightly, didn’t do the dovish Fed bets any favours, as expectations of a soft print did not materialize, confounding the raft of weak job indicators seen in the prior week.
Global inflation watch: Signs of cooling services inflation
Realized inflation landed close to expectations in January, as negative base effects weighed on the annual rates. Remaining sticky inflation is largely explained by services, while tariff-driven goods inflation remains limited even in the US.
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