The simultaneous purchase or sale of the same numbers of puts and calls with identical strike prices and expirations dates are called
straddles. If the positions involves the sale of puts and calls then it is called a short straddle. The buying of puts
and calls would be a long straddle.
An example of a long straddle would be the purchase of a put and a call with the same expiration
date and strike price. The area between the strike price and the price of the premiums, both above and below the strike price
is called the limited loss zone. To make a profit the price of the underlying security must either rise or fall out of the limited
loss zone.
It is possible to realize a profit on one leg and sell it off. The other leg can be held and hopefully the stock
will reverse in price so a second profit can be made. Because of the wasting nature of options, however, it is unlikely that
the second price movement will occur before the option expires.
A sale of a put or call with the same expiration date and strike
price is called a short straddle. This time the zone between plus or minus the amount of premiums from the strike price is called
the limited profit zone. As long as the price stays within this zone, a profit will be realized.
