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Mags | Wen you combine call and put at the same exercise price i.e. straddle? |
1.u make money wen the price goes up.
2.u mk money wen the price goes down.
3.u mk money wn thre is no change in price
4.u mk money irrespctive of the price going up or down. |
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maximac
 |
From point 4, I take it you are talking a short straddle - where you are selling both a call and a put at the same strike price. It is not as easy as you would propose. You would lose money if the stock makes a significant move in either direction.
For instance lets say that you have a stock that is trading at 24.50 per share. And lets assume that you sell put and call options at a 25. strike price that expires in 6 months. Lets assume you net 2.00 per share for the put option and net 1.50 per share for the call option for a total premium of 3.50 per share. Now lets look at your scenarios:
1. If the price goes up to higher than 28.50 by expiration you will lose money, because you will be forced to buy stock at higher than 28.50 to sell to someone else at 25.00 to cover your call. For example if the stock were at 32.50 at expiration you would be forced to buy it at that price and deliver to the option holder at 25.00 for a gross loss of 7.50 less the 3.50 option premium you received for a net loss of 4.00
2. Likewise if the price is below 21.50 at anytime during the life of the contract you would be forced to take delivery of the stock and pay the option contract holder 25.00 for that stock. So for example, if the stock was trading at 18.50 you would have to buy it at 25.00 for a gross loss of 6.50 less the 3.50 option premium for a net loss of 3.00 per share.
3. You would make money if the stock stayed between 21.50 and 28.50 at expiration and the option were not excercised at any other time during the life of the contract.
4. So you can see that you would not make money regardless of where the stock traded.
You could take some of the risk out if you are covered on the call by owning the stock for the call or have sold the stock short in the case of a put. But there is still risk of loss regardless.
Sorry there is no free money being given away in the stock market. |
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Ray
 |
When you say "combine", you are not saying if you buy or sell a put or call.
It will be a BIG difference.
Please explain further your strategy.
There is a straddle and there is a strangle.
There is also a calendar spread if different months.
Are you in stocks or commodities>?
I need more info before I can advise you. |
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mike g
|
Straddle
This strategy consists of purchasing the same number of Call and Put options at the same strike price with the same expiration date. The objective is to take advantage of any sudden movement in the stock price regardless of direction. The maximum risk is equal to the cost of opening this strategy, the maximum gain is unlimited |
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Keith
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Before I look for options, I look for a stock that is on a long habit of going in one direction. Once you find that, you won't need a strategy, just bet in that direction. |
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Banbalan B
|
You are specualting my friend. Straddles are complicated and somewhat risky animals. "Derivatives" are not for the novice.
Buying straddles will work only on stocks whose price move widely. Paying for the straddle is a cost, so if the price of the ubderlying stock does not move, you loose. As the stock moves in price, you realize a gain on one side of the straddle and a loss on the other. At some point, the gains covers the loss. But there is no guarantee this will happen.
The person writing the straddle (and selling it to you) is betting you will never "exercise" it. That is, the undelying stock price will not move enough for you to make a gain. That is how he/she will realize a profit! |
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robe
 |
Straddles are used on both the call and put side in equivalent amounts when the volatility spread is so broad of a range that it allows you to wait until you see a big move beginning (after your position setup) and once you can clearly see the direction in which the stock is moving (say, after an earnings report is released) you close out the oppositve position. If the range is too narrow, you may not be able to close out quickly enough to make an appreciable gain on the remaining position. If the range is broad enough, you have the potential for enough time to make this pay off. |
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Meraj Nu
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You make money when the price does down. |
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sothere!
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An options straddle is a play on expected big price movement in either direction.
You make money when the stock price goes up a lot or goes down a lot. If the stock price doesnt move much then you will lose money, the premium paid for the options. |
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