Anytime stocks make big moves there is an opportunity to make money. In fact if the stock moves far enough in a short period of time you do not need to even know which way the given stock will go in order to profit.
The straddle is a great way to do that. Let us look at an example of how it works. Say you find a volatile stock. You believe that this stock is going to move big one way or another. Maybe it is consolidating and will break out either up or down. Maybe there is a news event coming out. Whatever the reason you are predicting a big move.
The only problem is that you do not know which way the stock will move. That is where this spread comes in. But in order to understand how it works you need to understand what calls and puts are.
A call gives the purchaser the right to buy a given stock at a given price. For this you right you pay a premium and profit if the stock goes up. A put option gives the buyer the right to sell a given stock at a given price. You also pay a premium for this right but profit if the stock goes down.
So, if you are expecting a big move but do not know which way it will go you can profit by buying both the call and the put. If the stock goes up the Put you bought will lose money, but the call will make money. If it goes down the call will lose money but the put will make money.
This isn’t a miracle system. There is still a way you can lose money. If the stock goes up it has to go up high enough so that the call makes more money than the put loses, vice versa. A small or no move will probably end in a loss. A big move will probably end in a big gain.
For more information on strangles visit http://www.stocks-simplified.com/straddles.html
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