Option strategy straddle,options brokers review,how to trade options on futures - Test Out

10.10.2014 admin
An options strategy with which the investor holds a position in both a call and put with the same strike price and expiration date. Straddles are a good strategy to pursue if an investor believes that a stock's price will move significantly, but is unsure as to which direction. By having long positions in both call and put options, straddles can achieve large profits no matter which way the underlying stock price heads, provided the move is strong enough.
Because options prices are dependent upon the prices of their underlying securities, options can be used in various combinations to earn profits with reduced risk, even in directionless markets.
Straddles and StranglesA long straddle is established by buying both a put and call on the same security at the same strike price and with the same expiration. Maximum Reward : Limited to the Net Premium Collected from the At The Money puts and calls options sold. Net Position: This is a net credit trade as you are selling the puts and calls options of the same strike price and expiration date. Collect premium from puts and calls options and benefit from double time decay and a contraction in volatility. Let the options expire worthless and earn the full sum of premium collected Simply offset the spread by buying back the puts and calls options that you sold in the first place. This is a net credit trade as you are receiving the premium for both the puts and calls options sold. Next go to another sideways strategy, Short Strangle, to learn how profit can be make from a sideway market.


This investment strategy is profitable if the stock moves substantially up or down, and is often done in anticipation of a big movement in the stock price, but without knowing which way it will go.
Remembering that the last month of an option’s life has the greatest amount of time value erosion occurring.
For instance, if an important court case is going to be decided soon that will have a substantial impact on the stock price, but whether it will favor or hurt the company is not known beforehand, then the straddle would be a good investment strategy. Any investor contemplating these strategies should keep in mind the risks, which are more complex than with simple stock options, and the tax consequences, the margin requirements, and the commissions that must be paid to effect these strategies. Additionally, on stocks that are expected to jump, the market tends to price options at a higher premium, which ultimately reduces the expected payoff should the stock move significantly. One particular risk to remember is that American-style options — which are most options where the exercise must be settled by delivering the underlying asset rather than by paying cash — that you write can be exercised at any time; thus, the consequences of being assigned an exercise before expiration must be considered. The straddle buyer can only profit if the value of either the call or the put is greater than the cost of the premiums of both options.A short straddle is created when one writes both a put and a call with the same strike price and expiration date, which one would do if she believes that the stock will not move much before the expiration of the options.
If the stock price remains flat, then both options expire worthless, allowing the straddle writer to keep both premiums.A strap is a specific option contract consisting of 1 put and 2 calls for the same stock, strike price, and expiration date.
There are many possibilities of spreads, but they can be classified based on a few parameters.The money earned writing options lowers the cost of buying options, and may even be profitable. Because strips and straps are 1 contract for 3 options, they are also called triple options, and the premiums are less then if each option were purchased individually.A strangle is the same as a straddle except that the put has a lower strike price than the call, both of which are usually out-of-the-money when the strangle is established. However, this tends to make puts more expensive to buy, especially for options on the major market indexes, such as the S&P 500, while decreasing the amount received for the sold calls.


As with the short straddle, potential losses have no definite limit, but they will be less than for an equivalent short straddle, depending on the strike prices chosen. Most options spreads are usually undertaken to earn a limited profit in exchange for limited risk. Unbalanced option spreads, also known as ratio spreads, have an unequal number of long and short contracts based on the same underlying asset. Therefore, your total profit is almost $6,000 after subtracting the premiums for the options and the commissions to buy them, as well as the exercise commission to exercise your puts.
Margin must be maintained on the short options that are not balanced by long positions.The ratio in a ratio spread designates the number of long contracts over short contracts, which can vary widely, but, in most cases, neither the numerator nor the denominator will be greater than 5.
A front spread is also sometimes referred to as a ratio spread, but front spread is a more specific term, so I will continue to use front spread only for front spreads and ratio spreads for unbalanced spreads.Whether a spread results in a credit or a debit depends on the strike prices of the options, expiration dates, and the ratio of long and short contracts.
However, if, by expiration, the stock is less than $50 but more than $40, then all of your options expire worthless, and you lose the entire $4,050 plus the commissions to buy those options.



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