Thursday, April 29, 2010

The Long Straddle: Win Big or Lose Trying: I will stick with physical product!

A long straddle is an options strategy that uses both calls and puts. It takes advantage of the market volatility by profiting from either a large upward move or a large downward move. This straddle is not without a downside, though. That is the cost. The cost of a straddle is much more than buying a bull call or bear put spread.

Normally, the strategy entails buying a call and a put with the same strike price. One can also use different strike prices for there to be an adjustment to the break-even point. Another adjustment can be made when also writing calls, creating a butterfly spread. The strike prices plus the cost of the call and the put equals the break-even price. That means that a market that is not very volatile will not be profitable using this strategy.

Imagine, for example, that the strike price chosen is $80, the cost of the straddle is $160 and the point value is $10. That means the price of the commodity has to climb to 96 or fall to 64 in order for the strategy to break even. If the price stays between 96 and 64, the cost of the straddle is lost as maximum loss.

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