Stock options can seem complex when you’re just getting started with options trading. However, with the right options strategy, you can actually tailor the potential risk and return to accommodate your specific needs. One strategy that traders often rely on is known as the straddle option, which allows you to make money regardless of whether the market goes up or down. The key is that it has to move quickly in one direction or the other. Learn more about why the straddle option can be a good strategy for trading options.
What Is the Straddle Option?
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The straddle option is a strategy for trading stock options that involves buying both a call and put option at the same price and with the same expiration date. It’s similar to the strangle option except that with that strategy, there are different strike prices.
Traders use straddle options to succeed in a volatile market, as the further the stock gets from the strike price, the more profitable the trade will be. Because the trader owns both a call and put option, the total cost of both premiums represents the greatest potential loss the trader could experience. Given the way it’s set up, only the call or the put option will have value when it expires. However, the trader hopes that the call or put option will be valuable enough to make the entire position profitable.
There are two types of straddle options: short and long. The long straddle is designed to earn income in a volatile market. With a long straddle, the goal is to turn a profit regardless of which direction the market moves. When you’re trading using the short straddle position, the goal is to sell a call and put option at the same strike price and with the same expiration date. The premium that the buyer pays for the options is the profit the trader earns. This strategy only works well in a market that isn’t volatile.
Benefits of Long Straddles
The benefit of the long straddle position is that it can allow an options trader to be profitable regardless of what the market decides to do. If the market goes up, the options trader has a call option, and if the market goes down, the trader owns a put option. Unlike other strategies, long straddles are more successful when the market is volatile and moves sharply in one direction.
Benefits of Short Straddles
The benefit of a short straddle is that it allows traders to profit from a lack of movement in the market. Advanced traders use this strategy to take advantage of a decrease in market volatility.
Straddle options can be a great way to make money trading options without the pressure of trying to figure out which way the market will go. With long straddles, in particular, options traders can even make money in a market that’s highly volatile. Regardless of whether you use long or short straddle positions, both give options traders opportunities to earn profits. The key is to understand them and be prepared to put both to good use.