Trading Options Using a Straddle

Investors who wish to trade both call and put options simultaneously may do so with certain option trading strategies. This allows traders to benefit from the ups and downs of a stock’s constantly swinging market value. In order to trade both kinds effectively and as a part of one strategic investment, a straddle may be used.

We’ll examine right now how a long straddle works. When a trader buys a call and put option, simultaneously, regarding the same underlying asset, they are hoping to cover premium fees. The objective is that one option will profit to a degree that offsets the expense caused by the purchase of them both. So if one contract is successful, then the whole strategy stands a chance to serve its purpose

For example, say you buy a put and call option for Stock XYZ. Your call and put have the same expiration date but different strike prices. The call has a strike of $500 and the put has one of $400. The investor in this situation is anticipating that the market will move in one direction enough to offset the premium of both. If the investor can cover their total principal, they make money. Therefore, it doesn’t really matter which direction the market value of the stock heads in. Whether it falls or skyrockets, the profit is in the extent. Volatility, or fluctuation in price, is the biggest factor when utilizing the straddle option strategy.

The investor in this situation knows what their total cost of the option trade is. It’s $900 –the premiums of both options combined. This is also the maximum loss of a straddle. In the event that the underlying asset rises to some degree, the gains have no limit and allowing the put to expire would result in no further loss. Therefore, if the gains from the call cover the fee from the premium, the trader will likely not regret engaging the straddle strategy.

An investor can also make a gain from a loss in the value of the underlying asset. If the value drops to the minimum rate of $0, the maximum return on investment can be claimed. Certainly this case would be an extreme one, but it goes to show that one can make money from a fluctuation in either direction.

If you believe the market is looking particularly volatile, the straddle may be the ideal option strategy for you. You minimize risk and hedge your lack of certainty with a straddle option, and many have found it to be an attractive method.

Related Pages

Option Strategies

Weekly Options

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