Legal Definitions - straddle

Definition: In securities and commodities trading, a situation in which an investor holds contracts to buy and to sell the same security or commodity, thus ensuring a loss on one of the contracts. The aim of this strategy is to defer gains and use losses to offset other taxable income.

Example: An investor buys a call option and a put option on the same stock with the same expiration date and strike price. If the stock price goes up, the call option will be profitable, but the put option will result in a loss. If the stock price goes down, the put option will be profitable, but the call option will result in a loss. This strategy is used to hedge against market volatility.

This example illustrates the definition of a straddle, where an investor holds contracts to buy and sell the same security, resulting in a loss on one of the contracts. The investor is hoping to offset any losses with gains from the other contract, but there is still a risk involved due to market fluctuations.