Bought Straddle

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A bought straddle involves purchasing, both a call option and a put option on some stock. The two options are bought at the same strike price and expire at the same time. The owner of a bought straddle makes a profit if the underlying price moves a long way from the strike price, either above or below. Thus, an investor may take a long straddle position if he thinks the market is highly volatile, but does not know in which direction it is going to move. This position is a limited risk, since the most a purchaser may lose is the cost of both options. At the same time, there is unlimited profit potential.

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