A trader can add or subtract the price of the straddle to get the expected trading range of a stock. So, it actually means that option prices imply a predicted trading range. For example if the price of call and put is $55, traders can add a $5 premium. This way they can predict a trading range around $50 to $60. So, if the traded stock is around $50 to $60, the trader could lose their money but not all of it. In addition, in the expiration date, it is then possible to get profit if the stock rises or falls from the $50 to $60 zone. Therefore, how can a trader earn profit?
With the same sample of calculation, if the stock fell to $48, the calls would only be worth $0. As a result the put would only be worth as much as $7 at expiration. This would deliver a profit of $2 to the trader. However, if the stock is $57, it means that the calls would be worth $2. As a result the put would be zero, the trader faced a loss of $3. It is to note that the worst-case scenario could happen if the stock price remains at or close to the strike price. In order to understand the position, it is also important to know the advantages and disadvantages of straddle.
Straddle could be a good strategy when it enters potential income for both downside and upside. If the stock trading is at $300 for instance, you will pay $10 premiums for call and put options at a strike price of $300. In this scenario, if the equity moves to upside, you can capitalize the call. In the same sense, if it moves to the downside you could capitalize the put.
