Options Trading Strategies for a Volatile Market: Five Simple Options Trading Strategies for Consistent Profits in a Volatile Market by James Keith

Author:James, Keith [James, Keith]
Language: eng
Format: mobi
Published: 2014-07-20T23:00:00+00:00

Example

An example would be if you expected the price of ABC Company is going to suddenly move significantly but are unsure whether it will be up or down and the current value of the stock is at $25. You would want to buy a call option with a strike price of as close to $25 as you can find, and a put option with the same strike price. If you think the movement is going to occur within the next month then you would buy both of these options with the same expiry and at least one month to left.

Assuming the premium on each at the money option is approximately the same, say $1 for this example, then your total cost to set up this trade will be $1 + $1 = $2 times 100 shares in the option contract so $200. If you are correct and ABC company gets great news and the price rises from $25 a share to $30 a share, then you will make a profit of $5 * 100 shares = $500 less the premium cost of $200 = $300. If the price had dropped by the same amount from $25 to $20 then your profit would be the same.

In addition to these two profit alternative there is a third one, where the implied volatility of the underlying asset rises, while you are holding the two options even though the price of the underlying asset does not change, then the value of both of your option positions will still rise, and you will make a profit if you close them when the implied volatility peaks. If none of these situations occur before expiry you will lose both premium payments.

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