Options Trading Strategies: The Ultimate Guide to Start Trading Options Discover the Best Market Strategies and Secrets by Matthew Warren Hedge

Author:Matthew Warren Hedge [Hedge, Matthew Warren]
Language: eng
Format: azw3
Published: 2020-05-14T16:00:00+00:00

In the center of the chart, you see a flat line. This is the range in between the strike prices where you will have a maximum loss. From here, on both sides, the line slopes upward to the breakeven point, which remembers is the strike price + cost to enter the position on the upside, and the strike price minus the cost to enter the position on the downside. From there, the more the price moves past the strike prices of the options used to set up the position, the more profit that is earned. In the graph above, we see a hypothetical example with strike prices of $35 and $45, with a total cost to enter the position of around $5. The chart is for illustration purposes only and does not represent actual prices.

Let’s look at a real example to see how much this would cost. Facebook is trading at $208 a share, and we can enter a strangle that expires in one week for a price of $2.10, or $210 in total. The strangle has strike prices of $212.50 for the call and $205 for the put.

The breakeven point for the upside is $214.60. This is computed by adding the cost to enter the position, which is $2.10, to the strike price of $212.50. To earn a profit with this trade, the share price of Facebook would have to rise above $214.50. If the share price rose to $216.50, you would earn a $190 profit. If it rose to $224, you could earn around $1,000 in profit.

Under normal conditions, you wouldn’t expect the stock price of Facebook to rise to $224 a share. But if there was a very good earnings call, that is something that is definitely in the realm of possibility.

On the downside, the maximum possible profit on this trade is $20,200. To be profitable, it would have to drop below the strike price used for the put option, which is $205, less the cost of entering the position, which is $2.10, and so the breakeven point is $202.90. If there was a bad earnings call and the share price was to drop to $195 or so, you could earn a profit of $750.

Once the event has occurred, you can risk holding the position to expiration. If there are no other major movements in the share price, the options will expire, and you’ll earn your profits. But a good strategy is to simply sell the position for a profit once the major movement in stock prices has occurred.

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