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Sometimes referred to as a short straddle, the bear straddle is an investment strategy that involves taking a short position on both a put and a call option. The idea behind the approach is to maximize the chance of increasing the value of the stock portfolio in a very short period of time, usually within no more than a month. Here is some information about how a bear straddle can be arranged, and the benefits that usually result from the use of this investment technique.
In order to understand how the bear straddle works, it is necessary to understand what is meant by a straddle. Essentially, a straddle involves either the purchase or the sale of the same number of puts and calls. Along with selling or buying the same number of puts and calls, it is also important to make sure that all the securities involved have the same strike price and the same expiration date. The key issue to remember with a straddle is that the approach is banking on projections of how the market is going to function in either a short-term or long-term manner. Referred to as volatility, the puts and calls take into consideration specific conditions that the investor is sure will occur and will result in a profit from the buying and selling of the puts and calls.
The bear straddle is based on the premise that in the short term, there will not be a great deal of change in the stock price. The projection is that conditions seem to indicate a modest increase that will result in a small amount of profit from the buying and selling activity. With a bear straddle, the risk is somewhat minimized in favor of going for a small but almost certain amount of profit. In terms of playing the market safely, the bear straddle is a solid approach.
In contrast to bear straddles, the long straddle anticipates some sort of dramatic change over a longer period of time. Of course, this dramatic change could be in the favor of the investor, or could lead to a loss. Long straddles are for investors who are willing to take chances and can afford to cover a loss in the event that the volatile change does not go in the direction that the investor desired. While lacking the relative safety of the bear straddle, the long straddle does promise the chance to make a huge amount of money from the venture, even as it also could lead to a significant loss.