Options strategies
When buying options, you can do much more than just buy one!
Long Straddle
Options straddles rely on the underlying asset being extremely volatile at a certain date/period. When using this strategy, you buy both a call and a put option, at the same price, with the same expiration date. You may ask, how would you gain profit if they theoretically both move in sync to each other? The key is to remember one advantage to options: limited downside potential with unlimited upside.
To figure out if this strategy is worthwhile, you first must pick a strike price, in most cases being where the market currently is. Lets say 100$. The premium for the options are both 5$ total (or .05c each). In order for this strategy to be profitable, it needs to go above or below the price of both options combined, so in this case 100$ strike + 5$ premium call + 5$ premium put = 110$ or 90$. Anything above or below 110 or 90$ is profitable!
While doing this strategy, it may be easy to think that it is easy money for different events such as earnings calls or announcements, capitalizing on the volatility in either direction rather than making a bet, however due to the substantial difference needed, especially when adding up both premiums on both sides, it can be extremely risky to determine if the underlying asset will move with such volatility to be profitable. Option decay is also extremely important to take into consideration - the earlier you buy, the less the stock options are going to be intrinsically worth. If the stock is not volatile enough for a profitable sell or exercise, then the time decay will ultimately make your options and money invested worthless.
While this image may look confusing at first, it clearly explains the profit and loss of a stock price. The overall profit/loss graph is the full bar, the clear V shape that shows how you serve to profit if the stock changes drastically one way or the other. The dotted lines represent the individual call and put price, and the profits you would stand to make if you only bought those rather than both.
Still confused? Check out this good video from Investopedia!
To calculate a strangle's profitability, try using the straddle calculator
Long Strangle
A long straddle is similar to a long straddle, however it differs in one key area: the strike price for the put and call options are different values. The call will be above the current market price, and the put is below the current market price.
While this strategy may seem statistically like a weaker play due to the increased volatility needed to profit, once you take into account the lower premium cost for buying currently out of the money calls, it can sometimes be more worthwhile to choose a strangle rather than a straddle. In both cases, to measure what price you would need the stock to go up/down to, you would take the option's strike price, and add both of the premiums together.
Still confused? Check out this good video from Investopedia!
To calculate a strangle's profitability, try using the strangle calculator
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