All you want to know but never asked about the stocks and options markets.

domingo, 28 de diciembre de 2014

Strategies with options: Straddle

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This strategy encompasses the simultaneous purchase or sale of options of different types with the same strike price

a) Long straddle

It is a simultaneus buy of a put and a call option based on the same underlying asset and with the same strike price. It is a strategy employed by those traders who expect significant changes in prices, but uncertain about the market direction.

The risks of a long straddle are limited to the total premium paid. As for benefits, if prices rise, the Call option can be exercised with unlimited profit potential. If prices fall, the put option can be exercised with unlimited profit potential.

An example: Suppose that we bought a put option on a stock with a strike price of 5 USD paying a premium of 0.1 USD and at the same time we bought a call option on the same stock with the same strike price and premium paid.

Profile of a long straddle


b) Short straddle

This strategy involves the simultaneus sale of a put and a call option based on the same underlying asset and with the same strike price. It is a strategy employed by those traders who expect little or no movement in prices.

As for the risks, if prices rise the buyer of the Call option has the right to exercise the option with the potential for unlimited losses for the seller (writer). If prices fall, the buyer of the Put option has the right to exercise the option with the potential for unlimited losses for the seller.

Regarding the benefit is limited to the total premium received by the trader for the two options (Call and Put option).

An example: Suppose that we sold a put option on a stock with a strike price of 5 USD and a premium of 0.1 USD and at the same time we sold a call option on the same stock with the same strike price and premium received.

Profile of a short straddle




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