Straddle Strategy

The straddle option strategy is both a bullish and bearish strategy. It is basically buying two single options. It is the purchase of a single call option and a single put option at the same strike. This strategy is a favorite for stock which historically report earnings with large swings in the stock price. It is also used when there is an uncertainty about the direction of a stock. With this strategy, you cover both directions. This strategy requires a large move to happen for the debit (buy) strategy and little to no movement to happen for the credit (sell) strategy. Lets look at an example of both.

Debit Straddle Strategy

You are unsure about the direction of a stock. You have determined that the stock can make a large move in either direction. You are looking at buying the straddle. Using this strategy, you can make a profit so long as the stock moves in either direction, preferably in a fast manner. Ex. LinkedIn is at a point on the chart that shows it can make a move lower or higher rather quick. You buy the Jul 15 200 call/Jul 15 200 put. You are anticipating the stock to move in either direction.

Credit Straddle Strategy

You have determined that a stock will NOT make a large move in either direction and will remain in a range. You are looking at selling the straddle. Using this strategy, you can make a profit so long as the stock does NOT move in either direction, preferably in a fast manner. Ex. LinkedIn has been trading in a defined range. You sell the Jul 15 200 call/Jul 15 200 put. You are anticipating the stock to NOT move in either direction and remain within a range.

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