Straddle Option

The stock market has a lot of opportunities for investors. There are a lot of techniques and strategies available to help traders maximize their investments. Options trading is one of the best ways to make money in the stock market. Although options trading can appear to be complex, they give traders a lot of flexibility as far as portfolio diversification is concerned. There exist a number of strategies in options trading and one of them is referred to as a straddle.

The straddle option is a neutral technique whereby an investor simultaneously purchases a call option and a put option within the same underlying stock with a similar strike price and expiry date. According to tastytrade, “a short straddle is a position that is a neutral strategy that profits from the passage of time and any decreases in implied volatility. The short straddle is an undefined risk option strategy.” Provided that there is a shift in the underlying stock, your profit is potentially reduced. It is up to you to ensure that you maximize your chances.

What goes into a straddle option?

A straddle option comprises two options contracts namely; call option and put option. To execute the strategy correctly, the expiry dates of the two options must coincide and at the same time has a similar strike price. Basically, the call option offers you a right to purchase the stock at a predetermined price at any given time before the expiry of the option. On the other hand, the put option gives a trader the right to sell off the same stock with the same strike price before it expires.

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In order to purchase the two options, a trader will be required to pay at least one premium for the call option plus another premium for the put option. In the end, you will realize that the total amount of premiums paid represents a maximum potential loss on a specific straddle position. That’s is why it is important to pay attention when paying your premiums.

Types of straddle

There are basically two types of straddle positions and this explains how the technique works. The first type is known as a long straddle. This straddle is based around the buying of a put and a call option at the same expiry date and strike price. The main objective of the long straddle is to leverage the shift in the market price.

The second type is called the short straddle where a trader sells both the call and put options at the same expiration date and strike price. You can only succeed with this strategy when there is little or no volatility in the market.

When doing a straddle makes the most sense

Although a straddle potion is a great strategy, many investors tend to apply it when it is clear that a volatile event is about to happen. For instance, a lot of people start to use straddle positions when a popular company is about to announce its results.

Bottom line

The stock market is full of opportunities for investors. For you to take full advantage of the market, you need to understand how different strategies work. A straddle position has proved to be a great way to maximize profits.

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