Options Trading: A Beginner's Guide To Options Trading - Learn How To Make Money With Stock Options (Options Trading, Options Trading For Beginner's, Options Trading Strategies Book 1) by Maybury Matthew

Author:Maybury, Matthew [Maybury, Matthew]
Language: eng
Format: epub
Published: 2016-05-22T18:30:00+00:00

Long Straddle: This strategy is exactly the inverse of a short straddle, although still a neutral approach, in which an investor decides to buy both a long call and long put for the same underlying security with the same strike price and expiration date. Once again in contrast with the short straddle, the investor will want a high volatility market in order to gain maximum profits, which are earned once the stock price has moved markedly. This is an especially fitting pick since the investor does not have to know which way the market will move, since an increase or decrease will benefit the investor’s portfolio.

Fittingly, the graph is also the complete opposite of the short straddle graph. An example of this would be if the investor purchased a $30 call and put with the same expiration date and strike price for $100 each. If the value of the underlying security in question is trading at $30 at the time the contract is formed and is the same as the strike price come the options maturity, then the options will expire worthlessly and the investor will have lost $100. However, if the stock price increases to $35, then the put option will expire worthlessly and the call option will have an intrinsic value of $500. Subtract from that the initial investment of $200 (the call and put premiums) and the investor is left with a total profit of $300.

Advantages: Unlike most strategies, long straddles offer unlimited profit. This is because of the lengthy life of the option contract, which allows the stock price more time for a significant move. Note that this would not work with only a call or put; both are needed in order to make the long straddle a successful strategy. There is also very limited risk with this strategy, since the investor cannot lose more than the amount they paid to purchase the call and put.

Disadvantages: While a long option life does give the market more time to move, there is always the chance that it will end up the same as the strike price at its maturity. Should this be the case, both options will expire as worthless and the investor will lose the money used to buy the call and put. Additionally, long calls and puts tend to have higher premiums, which automatically increases the potential lost amount.

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