Let me tell you friends, taking long straddle on nifty option means buying both call option and a put option for nifty. These two options i.e call and put option are bought at the same time, same strike price and expiry. You will make profit in long straddle if Nifty future moves a long way from the strike price, either above or below. So a trader take nifty long straddle position if he thinks nifty may move sharply, but not sure about the direction. On this position trader has limited risk, which is limited to cost of acquisition of both nifty call and put options. This strategy has unlimited profit potential if price of nifty move sharply in one direction. Just look at the payoff diagram of this strategy:
When we apply long Straddle on Nifty Option:
Suppose there is very important news being released in 1 or 2 days, that news may move nifty 150 to 200 points in a single day. But we are not sure if that news will be positive or negative, hence in such condition trader can enter into a long in straddle strategy for nifty. In such case if Nifty move strongly in one direction then straddle holder will make profit. Suppose news was very good and nifty went up, trader will keep the call option and exit nifty put option. Other way if news was bad and nifty goes down sharply then trader will hold put option and exits from nifty call option. Third case is if market don’t react to news at all and nifty moves sideways then, trader loses money, both call and put option will erase some of the premium. In long straddle risk is limited to total premium paid for buying call and put options, but gains are unlimited if market moves in one direction strongly.