Options Trading Tutorial

In option trading when should you use straddle strategies?

Public Comments

1. If you are buying straddle, you expect the stock to move drastically either up or down. You don't know which way so you buy the call and the put around the current market price of the underlying stock. Then, you profit when the stock moves above or below your strike prices minus the cost of the position. If you are selling the straddle, you expect the stock NOT to move. You are betting that the stock will stay within a certain range so as not to be exercised. Then, you keep the income. In stock options, A_KANSAN (below) is referring to a Bull Call Spread. The terms and strategies are a little different in commodities.
2. Straddling is a way to reduce risk. While I have never traded stock options, I have traded commodity options. Straddling there consisted of say purchasing an option in a commodity and selling an option in a contract further out. For instance you would buy one contract of corn now, and sell one contract of corn to be delivered 6 months from now. The bet being that corn in the short run will go up, but will decrease in 6 months because of the amount of land planted with corn will increase and the value always goes down as you approach harvest. The problem is that it could work against you in both instances, going down now, and up then. Good Luck
3. A straddle should be used when you expect a large movement in a stock either way. For example, these can be used around news events that are on a fixed date, but the news is unknown, e.g. an earnings report. The danger of a straddle is the stock doesn't move and both the call and the put lose value.