What is the difference between a bear straddle and a bull straddle?

I'm looking through some sample questions and noticed that bull straddle is recommended when an investor is expecting a stock to have a big movement, but are unsure of the market direction.

I'm having trouble wrapping my head around why a bull straddle would be useful for this purpose (?) and why the inverse (a bear straddle) would not be recommended.

2

Discussion (2)

What are your thoughts?

Learn how to style your text

Mr. Raverse

01 Oct 2020

A bull straddle (or long straddle) involves buying both a put and call option at the same strike price.

If the price of the underlying doesn't move, you lose because you've paid the 2 option premiums but cannot exercise the options.
If the price of the underlying increased (or decreased) by more than the amount of the 2 premiums, you profit because you can now exercise the call (or put) option.

A bear straddle (or short straddle) involves writing (i.e. selling) both a put and call option at the same strike price.

If the price of the underlying doesn't move, you profit because the other party paid you a premium but cannot exercise either option.
If the price of the underlying moves more than the premiums, you lose because the other party can exercise the call / put option.

(Note: there is a some ambiguity in the terms used as some people use "bull" or "bear" straddle to describe the strike price and not whether one is long or short - i.e. bull straddle is when the strike price is lower than current price, and bear straddle is when the strike price is higher.

However, based on your question - I suspect this isn't the definition you meant)

Reply

Save

View 1 replies

Write your thoughts