What is the largest amount of money you can lose when buying a straddle option position?

Question

If I buy a call and a put on a particular stock, what is the most amount of money I can lose? Why would Scottrade not want me to do this? If there is volatility, I could cash in on the call and the put in the same week as I see it!

Answer 1

The most you can lose is the premium you paid plus transaction costs -- you know, your entire investment in the strategy.

Gaining on both positions is possible -- but highly unlikely. But you are right that an increase in volatility should make your overall investment positive.

I know of no reason why Scottrade wouldn't want you to do it -- unless it has to do with possible bad publicity involved if they let unsophisticated investors lose money trading derivatives.

Most brokerages won't let you trade derivatives unless you have a certain net worth. That usually applies to selling options rather than buying them, though. It may just be that you have to fill out some paperwork.

Answer 2

The maximum loss from any long option positions is the cost of opening the position. The most you can lose from a straddle is the cost of the call plus the cost of the put if you leave the positions open and the stock is exactly at the strike price at expiration.

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In theory it is possible to lose more. If either option is at least $0.05 in the money at expiration, and you do not sell it or give contrary instructions, the option will be automatically exercised at expiration. If the stock gaps on opening you could then have a large loss on the stock position.

This is only possible if you allow it to happen by ignoring an in-the-money option at expiration.

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Probably because they are not staffed to handle anything but the simplest of options transactions.

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<<< If there is volatility, I could cash in on the call and the put in the same week as I see it!>>>

If is possible, but unlikely.

Answer 3

You must work your way up to "advanced" option plays. They will let you in at level 1 which is covered calls, or being long a single option. The straddle is level 2 at most brokers. You have to prove yourself first by doing level 1 trades. Usually six months to a year. Your theory on straddles looks good on paper but is very hard to achieve in real life. Usually you don't "leg out" of any complex option position. If the straddle goes in your favor, you get out of the entire position for a small credit during the volatility. # of contracts is how you make the money, not % of move. Hanging on for a move in the other direction is usually futile.

Answer 4

If you are buying a call and a put, it's called a 'long straddle'... the most than can be lost is the cost of the options.