What is Buy Straddle ? (29 Hedging strategies by Vinay Bhandari)


Buy Straddle (29 Hedging strategies by Vinay Bhandari)

*Buy Straddle, It is used when the investor is expecting underlying to show very large movement. Investor expects the underlying to show high volatility Upside or Downside.

*This strategy involves Buying a Call as well as Put on the same underlying for the same maturity and Strike

*Price. It creates a good income for the investor.

*However, in case the underlying moves in either direction, up or down significantly, the investor’s profit can be unlimited.

*This is limited risk strategy and should be carefully adopted only when the expected volatility in the market is very high.

* Investor View: Neutral direction but expecting high volatility in underlying movement.

* Lower Breakeven: Strike Price — net premium paid.

* Higher Breakeven: Strike Price + net premium paid.

*Eg. Nifty is currently trading @ 15500. Buy Straddle can be created by Buying Call and Put Option for Strike 15500 having premium of 65 and 35 respectively. Net outflow of premium is 100.

The Payoff Schedule for the above is below.

In the above chart, the breakeven happens the moment Nifty crosses 15400 or 15600 and

risk is limited to a maximum of 7500 (calculated as Lot size * Premium Paid). Here it is important to note that the premium is calculated as the sum of premium paid for the Call and Put option

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