In option trading when should you use straddle strategies?

Answer 1

A straddle should be used when you expect a large movement in a stock either way. For example, these can be used around news events that are on a fixed date, but the news is unknown, e.g. an earnings report. The danger of a straddle is the stock doesn't move and both the call and the put lose value.

Answer 2

Virtually impossible and no. What special skills or abilities do you bring to the table (since at your age it obviously cannot be experience)? In the first place, trading in any area (stocks, ETF, futures, options, etc) is extremely difficult to sustain in the long run without a decent purse to start with. Let's call it £100,000 at a minimum. The more you trade above a couple of times a month and the longer you do it, the more the minimum will prove true. This is so because of the cost disadvantage of small trading combined with the use of leverage and the difficulty in limiting trading to the most profitable trades of the day, month, year. If trading your way from £500 to £1mm were that easy, everyone would be doing it. As a point of reference, "the above average" money managers are generally hitting just about double digit average returns after a decade of managing real money ($25mm +)...lets call it 11% although that is a tad high at the moment. The good managers are in the low teens (14%+) and the great managers are in the high teens (18%). Only a couple dozen can keep a batting average in the 20% over a decade or more and only a handful can continue that performance over multiple decades (here's a hint: most of those guys are worth billions now and they built companies too). None (zero, nada) did it by picking trade stategies out of a book and executing them without variation. To a man (and they are mostly men) they brought something new, different or special to the table and ran with it.

Answer 3

Straddling is a way to reduce risk. While I have never traded stock options, I have traded commodity options.

Straddling there consisted of say purchasing an option in a commodity and selling an option in a contract further out.

For instance you would buy one contract of corn now, and sell one contract of corn to be delivered 6 months from now. The bet being that corn in the short run will go up, but will decrease in 6 months because of the amount of land planted with corn will increase and the value always goes down as you approach harvest.

The problem is that it could work against you in both instances, going down now, and up then.

Good Luck

Answer 4

If you are buying straddle, you expect the stock to move drastically either up or down. You don't know which way so you buy the call and the put around the current market price of the underlying stock. Then, you profit when the stock moves above or below your strike prices minus the cost of the position.

If you are selling the straddle, you expect the stock NOT to move. You are betting that the stock will stay within a certain range so as not to be exercised. Then, you keep the income.

In stock options, A_KANSAN (below) is referring to a Bull Call Spread. The terms and strategies are a little different in commodities.