Wednesday, September 19th, 2018

Long Straddle

 

Many Wall Street traders are predicting a good year. Others are saying that the rally has run its course and is due for a big correction. What traders of both options are saying is that the will be a lot of variability to the stock markets in the coming year. For options traders who want to cash in on the ups and downs of the market, a long straddle may be one of the best kinds of options trading strategies for 2010. 

For the coming year when is trading call options a good option? If the options trader believes that a stock will be going up he or she will believe that buying call options is a good choice. He or she will buy call options and profit when the stock goes up, buying at the contract’s strike price and selling at the higher spot or market price. 

When is trading put options a good option for the coming year? When the trader believes that a stock will go down in price he or she will buy put options on a stock and profit when the stock loses value. The options trader will buy the stock at the lower market price, the spot price, and sell at the strike price, the price specified in the options contact. 

If, however, the experts are right this next year’s market will be volatile and uneven. Predicting stock movements over the short term of a few months may be very difficult. That is where a long straddle strategy comes in. What is an options trading strategy? An options trading strategy is combining any of the four options trading possibilities to improve the chance of success or reduce the risk in options trading. 

A long straddle is buying both a call and a put on the same stock with the same expiration date. In a long straddle options strategy the worst a trader can do is lose the cost the premiums paid for the call and the if the stock does not change price. However, this options trading strategy has potentially unlimited potential if the stock price changes significantly. 

If the stock price goes up the trader exercises the call option, sells the stock at the spot price and buys at the strike price. The profit is the price of 100 shares per contract at the spot price minus the strike price, minus the cost of premiums on both put and call options. 

If the stock goes down in price the trader exercises the put option and sells the stock at the strike price and buys at the new, lower market price, the spot price. The profit will be the price of 100 shares per contract at the strike price minus the spot price minus the premium cost of both put and call options. A long straddle options trading strategy carries twice the overhead of just trading puts or calls on an equal number of options contracts. However, the trader is reducing the risk of missing out on an unexpected market move by covering both up and down options. The long straddle strategy does not cover the possibility of the price of a stock not changing. If a stock price does not change the long straddle strategy will no result in any profit. To gain on stocks no changing in value the trader can use a short straddle options strategy. However, unlike the long straddle strategy, which only risks the premium price an unsuccessful short straddle can result in huge losses.

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