A composite speculative deal in two options.
A 'long' straddle’s profit/loss profile is ‘V’ shaped.
The long straddle results in profits from large changes in the underlying asset price, either up or down.
A speculator who buys a straddle is betting that the volatility of the underlying asset price will be greater than the pricing of the options implies.
For this reason, straddles are sometimes known as 'volatility trades'.
A long straddle is constructed by simultaneously buying a call option and a put option with identical strike prices.
It is also sometimes known as a bottom straddle.
The opposite composite transaction - which is a mirror image of the ‘V’ shaped long straddle - is known as a top straddle or a short straddle.
This is the position taken by the seller of a long straddle.
Sellers of straddles anticipate that the price of the underlying asset will stay close to the strike price of the options they have sold. If they are wrong, the short straddle can result in unlimited losses.
A speculator who sells a straddle is betting that the volatility of the underlying asset price will be less than the pricing of the options implies.