A long straddle is the best of both worlds, since the call gives you the right to buy the stock at strike price A and the put gives you the right to sell the stock at strike price A. The goal is to profit if the stock moves in either direction. Buying both a call and a put increases the cost of your position, especially for a volatile stock. Advanced traders might run this strategy to take advantage of a possible increase in implied volatility. If implied volatility is abnormally low for no apparent reason, the call and put may be undervalued.
The idea is to buy them at a discount, then wait for implied volatility to rise and close the position at a profit. Many investors who use the long straddle will look for major news events that may cause the stock to make an abnormally large move.
Look for instances where the stock moved at least 1. Lie down until the urge goes away. At first glance, this seems like a fairly simple strategy. However, it is not suited for all investors. If the stock goes down, potential profit may be substantial but limited to the strike price minus the net debit paid. For this strategy, time decay is your mortal enemy.
After the strategy is established, you really want implied volatility to increase. It will increase the value of both options, and it also suggests an increased possibility of a price swing. Conversely, a decrease in implied volatility will be doubly painful because it will work against both options you bought. If you run this strategy, you can really get hurt by a volatility crunch.
Options involve risk and are not suitable for all investors. For more information, please review the Characteristics and Risks of Standardized Options brochure before you begin trading options. Options investors may lose the entire amount of their investment in a relatively short period of time.
Multiple leg options strategies involve additional risks , and may result in complex tax treatments. Please consult a tax professional prior to implementing these strategies. Implied volatility represents the consensus of the marketplace as to the future level of stock price volatility or the probability of reaching a specific price point. The Greeks represent the consensus of the marketplace as to how the option will react to changes in certain variables associated with the pricing of an option contract.
There is no guarantee that the forecasts of implied volatility or the Greeks will be correct. Ally Invest provides self-directed investors with discount brokerage services, and does not make recommendations or offer investment, financial, legal or tax advice. System response and access times may vary due to market conditions, system performance, and other factors.
Content, research, tools, and stock or option symbols are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy. The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, are not guaranteed for accuracy or completeness, do not reflect actual investment results and are not guarantees of future results.
All investments involve risk, losses may exceed the principal invested, and the past performance of a security, industry, sector, market, or financial product does not guarantee future results or returns. The Options Playbook Featuring 40 options strategies for bulls, bears, rookies, all-stars and everyone in between. The Strategy A long straddle is the best of both worlds, since the call gives you the right to buy the stock at strike price A and the put gives you the right to sell the stock at strike price A.
Options Guy's Tips Many investors who use the long straddle will look for major news events that may cause the stock to make an abnormally large move. Both options have the same expiration month. Break-even at Expiration There are two break-even points: Strike A plus the net debit paid.
Strike A minus the net debit paid. The Sweet Spot The stock shoots to the moon, or goes straight down the toilet. Maximum Potential Profit Potential profit is theoretically unlimited if the stock goes up.
Maximum Potential Loss Potential losses are limited to the net debit paid. Ally Invest Margin Requirement After the trade is paid for, no additional margin is required. As Time Goes By For this strategy, time decay is your mortal enemy.
Implied Volatility After the strategy is established, you really want implied volatility to increase.More...