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to construct a perfect straddle, do I have to set the strike price to the current stock price? If the strike price is higher than the current stock price, what will happen? Thanks

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Although I think that I know what you are referring to, some clarification because your wording is a bit loose.

If the strike prices are different, it's a strangle. For a straddle, the strike prices are the same.

I'm going to assume that you're buying the straddle. Compared to the ATM straddle, if the strike price is higher than the stock's price, the call will be less expensive and the put will be more expensive. Your net delta will be more negative. That means that it will take less downside movement for the straddle to profit and more upside movement to profit. In the short term, your straddle will lose money as share price rises to the strike price.

The short answer is that if the strike is higher, the straddle is more bearish and if the strike is lower, the straddle is more bullish.

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Getting a perfect straddle is hard. You can wait for it to occur or make an order that triggers the creation of one at the right price. Not all brokers and not all exchanges support that.

You may have to program it yourself.

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  • I see. But, do I have to set the strike price to the current stock price? Does this matter? Commented Oct 5, 2020 at 20:58

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