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The Different Option Strategies
Long Straddle
A long Straddle is both a combined bullish and bearish trade. The trader will make money if the market makes a large move in either direction.
Long Straddle
Risk: Limited, but this is not a low-risk strategy because a Straddle is normally expensive to buy and both options are wasting assets.
Reward: Unlimited
The Trade: an at the money or near money call and put option are bought with the same strike price.

ABC Stock trading at £5.00

Buy 1 Sep £5.00 call and buy 1 Sep £5.00 put (see pay-off diagram below)

Options - Long Straddle

When to use: You believe that a stock is about to make a large move in either direction. A good time to utilise straddles is where there has been a prolonged period of extreme quietness (in prices) and implied volatility is around multiyear lows.

If this is the case look to do longer dated months rather than the shorter ones.

Volatility expectation: Very bullish. Volatility increases improve the position substantially. However if a straddle is bought when volatility is high it's tough to make a profit.
Profit: Unlimited if stock prices rise but semi-unlimited if stock prices decline as a stock cannot trade less than zero.
Loss: Limited to the premium paid in establishing the position. Loss will be greatest if the underlying is at the initiated strike at expiry.
Breakeven: Reached if the underlying rises or falls from option strikes by the same amount as the premium cost of establishing the position.
Time decay: Hurts a lot, remember you have double time erosion because of the two options bought. Decay depends a lot on volatility if volatility increases time decay will decrease.

Trading ideas and tactics:

  • Work best on stocks/markets that are likely to experience explosive moves

  • Consider 'legging' into them - buying the calls today and buying the puts on a rally or vice-versa

  • Always best to use some sort of time stop because of the time decay, ie if the stock hasn't moved significantly within 2 weeks consider getting out

  • If you're expecting a very large breakout then better to trade strangles

  • Very hard trade to make money on if you buy the options when volatility is high
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