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 ------------------------------------------------------- Price Straddles ------------------------------------------------------- The price “Straddle “ (Straddle or Long Straddle) is an excellent transaction to have in your investment playbook. This investment play involves combining multiple options at the same strike price. As the price moves you make money in either direction of movement! For example, a $50 call combined with $50 put would create a price straddle. Any price movement causes one option to increase in value and the other to decrease in value. You do have to cover the cost of the transaction but you get the idea! This play works best when some news causes increases in volatility of the underlying stock. Quarterly earnings announcements, new product announcement, merger of more than one competitor, bankruptcy of a competitor creating opportunity for remaining competitors are some examples of news that would cause an increase in the interest of a company. With some stories you may not know enough facts to determine if the news would have a positive or negative affect. Recently, COMPAQ computer and Hewlett Packard computer merged to form a powerhouse company. Executives told investors the merger would cut costs drastically and lead to higher profit margins. You can imagine the interest in the quarterly earnings announcements of this new company. If the news demonstrates the economies of scale are working the stock will simply take off quickly. However, if the economies of scales are not realized as quickly as investors were told the stock will sell off. The long straddle creates a transaction play that could generate profit in either direction? Two elements are needed to make this transaction a winning trade. First, the smaller the transaction cost the smaller the price spread, which means the price movement does not have to big in order to make a profit. Second, the volatility of the stock must be low when the transaction is initially created and high when the news is announced. Creating a straddle involves buying options only which means the transaction creates a cost or an expense in your brokerage account. The cost of the transactions shows up in your brokerage account as a debit. To exit the transaction you would create a credit transaction by selling the options purchased. The sale of the options creates a credit transaction in your brokerage account. Risk, Reward and Breakeven The risk profile can be seen from the below chart.  Straddle Example The top of our spreadsheet illustrates all of the information you need to know about creating the straddle position. In the money calls (ITM) and puts were selected for this transaction. This format keeps the cost, breakeven, potential profit, stop loss and reason why the transaction was created.  You must exit this trade to take the profit and avoid being called or assigned. If you did nothing and allowed the options to expire you own the right to buy Eastman Kodak for $25.00 (strike price). Your broker will require you to buy the shares, and then would sell the shares to realize the profit. Remember you should not hold options in the last thirty days from the expiration date. A price straddle offers two ways to exit the trade. In the Eastman Kodak example as the stock price moves up the Call option rose in price and Put option decreased in price. On 10-30-2002 the transaction was profitable because the Call options moved up very nicely. You could sell the Put for $.10 for a loss of $1.65 (Purchase Price of $1.75 – Put Price on 11-7-2002 of $.10) and let the Call options run. Once one side of the straddle becomes profitable sell the non-profitable side in order to maximize your profit.   Back | Vertical Spreads | Speculation Calls & Puts | Price Straddle | | Bonus Research | Weekly Option Plays | Research Performance | My Options Playbook | | Weekly Research | My Playbook | | Order Now | Return Home | Home Business | Digital Economy | Sign In | Disclaimer | Training Center | FAQ | What's New | Contact Us | |
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