Thesis: Long and Short straddle

Sample Thesis Paper

A long straddle is basically the strategy to purchase a call option with a put option, both of which have the same strike price. This has the impact of costing the transacting party the premiums for the option where the loss is restricted to these premiums whereas the gain is unlimited, depending on price movements for the underlying security or asset.

As the diagram illustrates, the transacting party is basically betting on volatility. The greater volatility there is, the more chance of gain. The more stable the price, the more chance of the party of making a loss. The strategy thus serves well in a volatile market.

A short straddle does the opposite. It basically involves taking a short position on a call and put option with the same strike price. The party thus gains the premiums for both the option. This is the maximum gain in the strategy. The maximum loss however can be anything. This strategy is followed when the investor bets that the market will not be very volatile and prices will remain stable.

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