The straddle option trader written by: kalikuv Straddle options are perhaps one of the easiest and safest methods of making money in the stock market. Straddle options consist of buying one call option (a long bet) as well as one put option (a short bet). Due to this, a straddle has the potential to make an infinite amount of money in either direction, with very little risk. A trader does not have to know the future direction of the stock in order to profit. As long as the stock moves up or down, a trader will experience profit.Straddles are the greatest means of making consistent income in the stock market. Since straddles can make money in either direction, the hardest aspect of trading, direction, has been eliminated. Traders will no longer have to guess the future direction of stock price. Arming themselves with a call and a put, a trader is prepared to make money in either direction.
The profit potential of a straddle is unlimited. The stock has the potential to rise and fall an unlimited amount. As the stock rises, the call option will gain value. At the same time, the put option will be losing value. If the stock falls, the put option will be gaining value and the call option will be losing value. The underlying stock will have to move enough for either the call or put option to offset the losses of the other.
In either case, losses are completely limited to the amount paid for the options. Unlimited profit and very limited losses make straddle options one of the safest and most effective means of trading. Despit this, very few traders utilize this lucrative trading method.
A trader should use a straddle when they believe a stock will soon make a significant move. The trader can then buy one call and one put option with the same strike price and the same expiration date. The trader can now make money as the stock moves in either direction. The direction of the imment breakout does not matter. If the stock rises, the call option will make money. If the stock falls, the put option will make money. In either case, a sizeable move is enough to make a great deal of profit while taking all the guess-work out of the market.
Many traders will place straddle trades before major events, such as earnings releases or FDA reports. Although these events often cuase dramtic events in stock price, option prices will often become over-inflated to relect the future volatility.
The best way to profit from straddles is to locate areas of low volatility. Then a trader can profit when volatility increases. Areas of low volatility are most often followed by explosive movements in stock price.