How to straddle options

How to straddle options

If at the expiration date, the ABC stock is trading at $675, the Dec 655 put will expire worthless, but the Dec $655 call will expire in the money. In this case, our option trader will make $67 ($75 from the sale of option -$8 from the premium he pays to go long the straddle).

Strangle Definition - Investopedia

Options strategies can seem complicated, but that's because they offer you a great deal of flexibility in tailoring your potential returns and risks to your specific needs. One interesting strategy known as a straddle option can help you make money whether the market goes up or down, as long as it moves sharply enough in either direction. The straddle option is a neutral strategy in which you simultaneously buy a call option and a put option on the same underlying stock with the same expiration date and strike price. As long as the underlying stock moves sharply enough, then your profit is potentially unlimited.

Long Straddle Options Strategy - Fidelity

Options trading relies on many estimates of value and volatility. Among these, the most useful estimate is Delta. Even knowledgeable options traders might not fully understand the “Greeks” and how they operate, especially with one another. They are directly related and are useful in making comparisons of market risk and volatility.

Straddle Option Strategy - Profiting From Big Moves

Now, the straddle requires buying (or selling) at the money call option and buying (or selling) at the money put option. To simplify things we’re going to assume that the $55 strike call is worth $6 and the $55 strike put equals a $6 too.

When the stock price is at or near the strike price of the straddle, the positive delta of the call and negative delta of the put very nearly offset each other. Thus, for small changes in stock price near the strike price, the price of a straddle does not change very much. This means that a straddle has a “near-zero delta.” Delta estimates how much an option price will change as the stock price changes.

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A long straddle profits when the price of the underlying stock rises above the upper breakeven point or falls below the lower breakeven point. The ideal forecast, therefore, is for a “big stock price change when the direction of the change could be either up or down.” In the language of options, this is known as “high volatility.”

Before expiration, you might choose to close both legs of the trade. In the above example, you could simultaneously sell to close the call for $, and sell to close the put for $, for a gain of $695 [($ + $) x 655]. Your total profit would be $775 (the gain of $695 less your initial investment of $875), minus any commission costs. 

Owners of options have control over when an option is exercised. Since a long straddle consists of one long, or owned, call and one long put, there is no risk of early assignment.

Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results.. [Read on.]

Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date.. [Read on.]

As with all your investments through Fidelity, you must make your own determination whether an investment in any particular security or securities is consistent with your investment objectives, risk tolerance, financial situation, and evaluation of the security. Fidelity is not recommending or endorsing this investment by making it available to its customers.

Our trend following system looks at two things when planning a position. The first piece is obviously the direction of the trend.  Does the system signal up or down?  The second piece of a position plan is how much risk we are going to take. 

The straddle call strategy has unlimited profit potential and limited risk. The only risk you take is the premium you pay when you use this type of call strategy.

Straddle option positions thrive in volatile markets because the more the underlying stock moves from the chosen strike price, the greater the total value of the two options. Given the way that the straddle is set up, only one of the options will have intrinsic value when they expire, but the investor hopes that the value of that option will be enough to earn a profit on the entire position.

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Long straddles involve buying a call and put with the same strike price. For example, buy a 655 Call and buy a 655 Put. Long strangles, however, involve buying a call with a higher strike price and buying a put with a lower strike price. For example, buy a 655 Call and buy a 95 Put.

The straddle strategy will likely just be one part of your broader approach to the market. Depending on your current situation, you may want to consider trading RSUs (restricted stock units) alongside ordinary options.

If XYZ stock is trading at $55 on expiration in July, the JUL 95 put will expire worthless but the JUL 95 call expires in the money and has an intrinsic value of $6555. Subtracting the initial debit of $955, the long straddle trader's profit comes to $655.

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