Ask Ai what a "straddle" is.
Here is an example of how one could possibly work. I picked a stock which appears to be going sideways but could have a breakout upwards or downwards. Why think about doing a "stradle" when a stock is going sideways? Well it is sometimes a period of time when the premiums on options, both Calls and Puts settle down with less of a premium for a bias in either direction. Look at these Call and Put options on Walmart.
So the question now is how can owing both the Calls and the Puts at the same time on the same stock and with the same striking price make you money? Doesn't that seem kind of odd? The answer is in one of two ways. 1) The first way is to add these nunbers together. Add 68+5+53=$1.26. This number represents the cost of purchasing the Call option, the cost of the Put option and the price it is already "in-the-money". The stock now is trading at $12.05 so purchasing both a Call and Put would pay off only under two scenarios. The first is if and when the stock starts to trade above $113.21 level. It would be at that time that the cost of holding both the Calls and Puts would be paid off creating the base of a break even trade. Any price increase above this level would be pure profits. 2) The second way to create a profit would be when the reverse of this situation happens. Once again, add the cost of both the Calls and Puts and subtract the amount ($.05) it is already in the money. This number would be $1.16. If and when the stock drops to $109.84 profits would start to kick in. The cost to do this trade would be $126.00 dollars plus the cost of two commissions in and one commission out on the sell side. If the stock on Friday at 3:00 p.m. ends up closing anywhere between $110.79 and $113.21 you would be out some money. Looking at it's now current five day chart what do you think are the odds of this happening? There are only two days of trading life left in these options.
There is a third part to this story. Is the potential loss really $126.00 plus the cost of three commissions? If the stock closes on Friday at 3:00 p.m. at any number other than $112.00 then one of these two options will have some "in-the-money" value left in them. I will track this situation and show you the final outcome. Straddles are not my favorite thing to do. Once again, a third commission will have to be paid to close out the one remaining position which will be "in-the-money". Let's see what happens. * Straddles make more sense to do with longer time periods. Yet then again the premiums cost more. Let's see what happens.
Comments