Straddle - Buy Calls and Puts with the SAME Strike Price and Expiration Date.
- Most popular volatility strategy
Strategies...
- Buy at-the-money Call and Put with expiration 2-4 months away.
- Do Straddle before any announcement of a company (to profit from volatility of the stock)
- Ensure movement of stock price is enough to cover the premium paid to both Call and Put.
- Make profit with stock price moving in either direction.
- Limited downside risk, uncapped upside potential profit.
Example...
Wal-Mart Stores, Inc.(NYSE:WMT) is traded at $65.70 on May, 2012. It's earning report will be released next week, to do a Straddle, you
- Buy July 2012 $65 Call at $2.00.
- Buy July 2012 $65 Put at $1.40.
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| Long Straddle |
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| Long Straddle |
Advantages...
- Profit from stock's movement
- Uncapped potential profit
Disadvantages...
- Pay options premium TWICE.
- movement of stock must be significant to cover all costs.
- Time decay accelerates as options close to expiration.
Maximum Loss: $2.00 + $1.40 = $3.40
(Call Premium + Put Premium)
Breakeven Up: $65 + $3.40 = $68.40
(Strike Price + Premium Paid)
Breakeven Down : $65 - $3.40 = $61.60
(Strike Price - Premium Paid)
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