A Straddle is a neutral options trading strategy that involves buying a call option and a put option at the same strike price. A straddle is a neutral options strategy because it's profitability is independent of the direction of any movement in the underlying.
Long Straddle
A trader establishes a long straddle by simultaneously purchasing a put option and a call option at the same strike price and expiration date. A long straddle profits from an increase in implied volatility and any substantial move in the price of the underlying asset. As with any long strategy, a long straddle suffers from the effects of time decay. If the price move in the underlying occurs over a long period of time or the move is not large enough the position will be a loss at expiration.
Payoff
Short Straddle
A trader establishes a short straddle by simultaneously selling a put option and a call option at the same strike price and expiration date. A short straddle is a bet that implied volatility will decrease or that the price of the underlying will not move substantially during the life of the options. If the price of the underlying asset increases or decreases quickly during the life of the option then the position will incur a loss. Otherwise the profit will be equal to the amount of premium collected when the position is established.
