The strategy makes money if the underlying stock price stays around its current level. Say a trader wants to target the same area of the curve, but wants to limit his downside, a butterfly spread strategy is a good option in this case.
Below we will examine another possible strategy if we take the view that the stock will stay approximately at its current levels.Īs we mentioned for the reverse straddle strategy, the downside is potentially unlimited for entering this position. Going back to the example of XYZ company, perhaps we take the view that the earnings will be exactly as expected and therefore the news is already priced into the stock, we could sell both a call and a put option to collect the premiums with the view that the stock will be around its current level this time next week.Ĭlearly there is much more downside risk associated with a short straddle strategy. We can also implement a short straddle position if we believe the stock will stay around the area it is currently. Say XYZ companies earnings are coming out next week, you observe a call and a put option in the market selling for $5 each at a strike price of $100 and the stock is currently trading at $100 also. Let's take an example of a straddle strategy. Since we are buying a call option, the potential profit from entering this strategy is potentially unlimited, however, since we are also buying a put option the cost of entering a strategy such as this is higher than just buying one or the other. For example, say XYZ company earnings are going to be released in the next week, a trader could buy a straddle expecting the company to blow past earnings estimates or dramatically under perform, since we aren't sure about which of the two scenarios will happen, we can buy both a put and a call. This is an especially useful strategy when a trader predicts a large increase in the uncertainty of an asset price, and the likelihood of a large move, but he is unsure about the direction of the move. The idea here is that the trader will benefit from a large move in the price of the underlying stock regardless of the direction of the move. In the interests of simplicity we will assume that we only buy a single option, whereas in real life options contracts generally come in lots of 100.Ī straddle is a strategy in which a trader buys both a call option and a put option at the same strike price.
CONDOR 2 TUTORIAL CODE
The code for recreating the diagrams used for this article can be found at the end of the document. In this article we will cover some advanced options trading strategies that involve buying and selling a mix of both calls and puts options. Menu Straddles, Butterflies, Iron Condors and More
0 kommentar(er)
