Long straddles are used in anticipation of which market condition?

Long straddles are investment strategies that involve holding both a call option and a put option on the same underlying asset with the same strike price and expiration date. This strategy is specifically employed when an investor anticipates significant movement in the price of the asset, but is uncertain about the direction of that movement—upward or downward.

Volatility is the key market condition targeted by long straddles, as increases in price movement (whether up or down) can lead to profitable outcomes for the options held. As the asset’s price becomes more volatile, the potential for profit increases, allowing the investor to benefit from large price swings. Therefore, if the market is expected to experience volatility, the long straddle would be an appropriate strategy, as the investor stands to gain from these fluctuations.

In contrast, stability, consistency, and predictability suggest lower uncertainty and minimal price movement, which would not be conducive to the profitability of a long straddle. In such scenarios, the options would likely expire worthless, leading to losses. Thus, the anticipation of volatility is the driving reason behind using a long straddle strategy.