A straddle option

-

 What we do.

A straddle option is an advanced options trading strategy that involves buying both a call option and a put option with the same strike price and expiration date on the same underlying asset. This strategy is typically employed when the investor or trader expects significant price volatility in the underlying asset, but is uncertain about the direction of the price movement. By using a straddle, the trader can potentially profit from large price swings, regardless of whether the asset's price goes up or down.

When you purchase a straddle, you're essentially paying a premium for the right to buy (call option) or sell (put option) the underlying asset at the same strike price, regardless of the future price movement. If the price moves significantly in one direction, you can exercise the corresponding option while letting the other option expire worthless.

Example of a straddle option:

Let's say you believe that a highly anticipated earnings report for Company XYZ will be released soon, and you expect the report to cause significant volatility in the stock's price. Currently, the stock is trading at $100 per share, and the earnings report is scheduled for next week. You decide to use a straddle option strategy to profit from the anticipated price movement.

Buy a Call Option: You purchase a call option on Company XYZ with a strike price of $100 and an expiration date after the earnings report release. This call option gives you the right to buy Company XYZ shares at $100 per share if you choose to exercise it.

Buy a Put Option: You also buy a put option on Company XYZ with the same strike price of $100 and the same expiration date. This put option gives you the right to sell Company XYZ shares at $100 per share if you choose to exercise it.

Scenario 1: Bullish Surprise

After the earnings report is released, Company XYZ reports excellent results, and the stock price surges to $130 per share.

You decide to exercise your call option to buy the shares at $100 per share (the strike price) and then immediately sell them in the market at the current price of $130 per share.

Profit from the call option = $130 (current stock price) - $100 (strike price) = $30 per share.

Scenario 2: Bearish Surprise

Unexpectedly, the earnings report shows disappointing results, and Company XYZ stock plummets to $70 per share.

You decide to exercise your put option to sell the shares at $100 per share (the strike price) and buy them back at the current price of $70 per share in the market.

Profit from the put option = $100 (strike price) - $70 (current stock price) = $30 per share.

In both scenarios, the straddle strategy allows you to profit from the significant price movement, regardless of whether the stock price goes up or down. However, keep in mind that using straddle options involves higher risks and costs due to the need to purchase two options simultaneously.

Comments

Post a Comment

Popular posts from this blog

Church’s Globe-Spanning Real-Estate Empire

-
Image
  Inside the Mormon Church’s Globe-Spanning Real-Estate Empire From Guam to Cape Verde, the Church of Jesus Christ of Latter-day Saints is using the financial cushion of its $100 billion investment portfolio to go on a temple-building spree A whistleblower revealed a few years ago that the Church of Jesus Christ of Latter-day Saints had an estimated $100 billion investment portfolio, and at the time, church officials called the holdings a rainy-day account. They now say the money also has provided a financial foundation that gives the Mormon Church confidence to construct more than 100 temples, from Cape Verde to Guam, a series of stone-clad monuments exhibiting the church’s vast and expanding wealth. In Pocatello, Idaho, a city of 56,000 in the rural southeastern corner of the state, a recently constructed temple stands at 71,125 square feet. Its polished limestone flooring was quarried in Bethlehem, the biblical birthplace of Jesus, and wood for its doors was imported from the Congo
Read more

tech companies

-
Image
 Good to know. The way tech companies continue to deliver ever-faster and more capable computers is undergoing a profound change—at the atomic level. Performance gains that were for decades accomplished mostly by shrinking the individual components on microchips—often described as Moore’s Law—are now increasingly the result of materials science, which is evolving faster than it has in decades. Santa Clara-based Applied Materials, founded in 1967, a year before Intel, is the biggest of the companies that are leading the way. It’s a change born of necessity. Chip makers are bumping up against a hard limit on how tiny the elements on chips can become, as some of their features can now be measured at the scale of just a few atoms. As a result, manipulating what materials are in these tiny machines, and how they’re connected to one another, has become a primary way that engineers can continue to make them faster and more capable. Applied Materials AMAT 0.72%increase; green up pointing trian
Read more