Wager Mage
Wager Mage
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From the above example, you can see that a long straddle options strategy earns profits even when the underlying asset's price goes down. It can ensure that the investments are protected at the time of volatility and when investors are not sure about the market trend.
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Read More »What is the Long Straddle Options Strategy? You can be an amateur investor who is just starting and trying different strategies or a professional who knows when and where to invest money. However, one thing is universal and known to both types of investors: The financial market is volatile. Volatility is the phenomenon where the price of assets in the financial market moves rapidly. It means that the price can fall or rise in a short period. Generally, volatility is seen as an opposing force that can result in investors losing money. However, for professional investors who have experienced, learned, and tackled the market for many years, volatility in either direction is a welcome way to make profits. Making profits amid volatility is not easy if you have limited knowledge about various asset classes. Furthermore, investing solely in stocks in a volatile market without the right information is sure to push you towards losses. However, successful investors make profits irrespective of the current trend of the market. If you ask any successful trader about the strategies they use to make profits in a volatile market, the conversation always leads to Derivative trading and its type called Options Trading. What is Options Trading? An Options trading contract is generally permitted in top assets wherein the trader has the right but not a legal obligation to buy/sell the purchased security at a fixed price. Such a contract helps investors make a profit based on price fluctuations without buying/selling the contract. Types of Options Contract Call Options A Call option is a contract wherein you win the right, but not the obligation, to buy a certain underlying asset at a decided-upon price and date between the contracting parties. Put Options A Put option works exactly opposite to the call option. While the call option equips you with the right to buy, the put option empowers you with the right to sell the stock at the date agreed upon by the contracting parties. Options Trading Strategies Options trading is a broad concept that includes numerous strategies. These strategies, such as the bear put spread, the bull call spread, etc., are used by derivative traders to turn profits in any given situation. One such Option trading strategy that investors use to make profits in a volatile market is the Long Straddle strategy. However, to understand the Long Straddle strategy, you need to know some common terms. Some terms associated with Long Straddle Strike Price: The price at which the options contract was initially bought or the pre-determined price. Spot Price: The current price of the underlying asset is attached to the option contract. Premium: It is the price you pay to the seller of the option for entering into the online trading options. In-The-Money (ITM) call option: When the underlying asset price is higher than the strike price. Out-of-the-money (OTM) call option: When the underlying asset price is lower than the strike price. What is the Long Straddle Strategy? A Long Straddle Strategy consists of buying a long call and put option simultaneously. Both of the options have the same underlying asset, strike price, and expiration date. A Long Straddle strategy is a neutral strategy that aims to make profits in a highly volatile market, i.e. when investors think that the price movement may be considerable and may fall or rise by a huge margin. Such volatility may arise at the time of the declaration of budget, a company’s results, or any big market-related news or event. Maximum Profit in Long Straddle Strategy: This is unlimited and based on the underlying asset’s price rise. The higher it rises, the higher the potential profits. On the downside, the profits are limited but substantial as, in theory, the asset’s price may fall to zero. Maximum Loss in Long Straddle Strategy: This is the total cost of the Long Straddle plus commission. It is limited to the amount of loss if both contracts are held until the expiration date, and they expire worthlessly. It happens when the strike price is equal to the spot price of the underlying asset at the time of expiry.
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Read More »Long Straddle Strategy example: How does Long Straddle Options Strategy work? Consider the following example: An investor wanting to execute a long straddle strategy may do the following transactions: Buy September 50 Put - Rs 5 Buy September 5o Call - Rs 5 Here, the underlying asset is trading at Rs 50 (spot price), Rs 5 is the premium amount, and there are 100 shares in one lot. Hence: Buy September 50 Put: 100x5 = Rs 500 Buy September 50 Call: 100x5 = 500 Net Debit (Loss) of premium: Rs 500 + Rs 500 = Rs (1,000) Scenario 1: The asset’s price remains unchanged at Rs 50. Buy September 50 Put - Expires worthless Buy September 50 Call - Expires worthless Net Debit (Loss) of premium: Rs 500 + Rs 500 = Rs (1,000), that was paid initially. Total Loss: Rs 1,000. Scenario 2: The asset’s price rises to Rs 70. Buy September 50 Put - Expires worthless Buy September 50 Call - Expires in-the-money with a value of (70-50)x100 = Rs 2,000 Net Debit (Loss) of premium: Rs 500 + Rs 500 = Rs (1,000), that was paid initially. Total Profit: Rs 1,000 (Rs 2,000 - Rs 1,000). Scenario 3: The asset price falls to Rs 30. Buy September 50 Put - Expires in-the-money with a value of (50-30)x100 = Rs 2,000
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Read More »Buy September 50 Call - Expires worthless Net Debit (Loss) of premium: Rs 500 + Rs 500 = Rs (1,000), that was paid initially. Total Profit: Rs 1,000 (Rs 2,000 - Rs 1,000). Total Loss: Rs 1,000. From the above example, you can see that a long straddle options strategy earns profits even when the underlying asset’s price goes down. It can ensure that the investments are protected at the time of volatility and when investors are not sure about the market trend.
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