Buy Straddle Option Strategy
When volatility is low and you are expecting a large break- out move, but you aren't sure which way it will break out, you might consider buying a straddle.This strategy involves buying a call option and a put option on the same asset at the same strike price and expiration date. This gives you limited risk and unlimited profit potential with a major move in either direction.
With this strategy, your potential loss is limited to the premium you paid for the call and the put and the commissions.
Technical indications that we look for when we buy a straddle are a tight trading range in a triangle pattern. This is frequently followed by an explosive move near the tip of the triangle, but it is not always apparent ahead of time which direction it will move. Many traders watch for this pattern and jump on the bandwagon when it makes its move. If you are in position with both a put and a call, you will get a quick reward with one of the positions and you can liquidate the other. Then ride the trend, but don't get too greedy. Time decay works against you in this position.
When we buy a Straddle, the put and call that we purchase are normally at-the-money or close to it. We look for the triangle pattern with a tightening trading range, and initiate the position near the tip of the triangle, so that it is in place before the break-out. This is important because the options will be cheaper to buy before the break-out because volatility is low due to the tight trading range pattern. Since you are buying both a put and a call, you want to minimize the cost of the options. When the break-out occurs, volatility will spike up, driving up the price of the options. We generally allow three or more months before expiration, to provide enough time for the market to make its move, but we just stay in long enough to reach our target, because decay is working against us.
It is also important to cover risks and caveats of this strategy.
The risk of this position is limited and known. The cost of this position tends to be higher because you are buying both a put and a call, but by careful positioning as described above, you can minimize this cost. Remember that the commission you pay for this position will be higher because you are initiating two related option transactions. If the asset stays in the tight trading range and doesn't break-out sufficiently during the term of your position, you will lose money. Decay is working against you with this position, but that is ameliorated if you initiate the position close to, but before the break-out, and then quickly liquidate the option on the wrong side of the break-out.
It is important to analyze your expectations for the underlying asset and for the market before selecting your strategy.
When you are analyzing potential option positions, it helps to have a computer program like Option-Aid that swiftly calculates volatility impacts, probabilities, statistics, and other parameters of interest. These programs can pay for themselves with the first trade that they help you with.
Buy Option-Aid Today and Maximize Your Profits!
As you start using this valuable option software program and become familiar with the vast amount of information it puts at your fingertips, it quickly becomes an indispensable tool for evaluating option positions.
Information is the Key to Increasing Wealth
Option-Aid is a great trading tool for playing out "what-if" scenarios to maximize your profits and minimize your losses. It has many features to give you the Trader's Advantage.
Buy it today! Profits from your first position can more than pay for the program. Your order will be placed through a secure server.
It will change your future! Order it now!
Get FREE Option Tips
The Option Trading Tips Newsletter is published by MindXpansion, the developers of Option-Aid. This newsletter gives you information for maximizing your profits in options trading, including option strategies and market indicators. Fill in the following information to subscribe to this FREE service.