Long Straddles
Straddles are a neutral strategy with a mid-range of risk and high potential
for reward.
How it works: If you are sure a stock is about to move, but just don't know
which way, the straddle is a good strategy. You purchase a call and a put at
the same strike price at which the stock is selling. If the stock moves big
in either direction, one option will make a profit and the other will expire
worthless.
Example: Your stock is trading at $80. You purchase the $80 call and the $80 put.
If the stock gaps up to $110, the calls will be worth $300 and the puts would expire
worthless. If the stock gaps down to $50, the put will be worth $300 and the calls
would expire worthless.
The payoff: If the stock moves big, you win big.
The drawback: If the stock remains at the same price, you could lose on the
call and the put, the cost of your two option purchases.
|
