Option Strategies- Bottom straddle or Straddle purchase

Bottom straddle or Straddle purchase

Salient Features

a) Market is expected to take volatile move but its direction is not clear         b) Unlimited profit and limited loss  Introduction: When an investor expects volatile movements in the market but he is not sure of the direction of it then he may enter into a bottom straddle strategy that means buying a Call and a Put together of the same strike price and same expiry date. Let us take an example to understand this in detail- an investor takes following positions on 27th May 2005 when Nifty Spot was Rs.2070. Action Option type Strike Premium Total investment Long Call 2100 24   Long Put 2100 59 83 Here he buys Nifty Call and Put option of same Strike price (Rs.2100) he pays a net amount of Rs.83 as premium (Rs.24 paid for long Call position and Rs.59 paid for long Put position) to create the position. His cash flow at different levels of Nifty closing on 30th June05(last Thursday of the following month) are as follows: Index Long call Long Put Investment Cash flow 1900               -            200 -83                     117 1950               -            150 -83                       67 2000               -            100 -83                       17 2050               -              50 -83                      (33) 2100               -              -   -83                      (83) 2150               50            -   -83                      (33) 2200             100            -   -83                       17 2250             150            -   -83                       67 2300             200            -   -83                     117 Thus it is clear that his profits will occur only when the market moves beyond a certain range of prices (here it is Rs.2000 to Rs.2200), otherwise he will make loss (in case market remains within the range). This strategy is useful when we expect volatile movements in the market, which may be prior to any major announcements, ahead of financial results of company, election time, etc.