* I really enjoy the straddle strategy, especially with this uncertain world we currently live in. Whether it is key world events, surprising economic data, accounting irregularities or even earnings statements out of whack, the catalysts for market movement are always present. This market environment not only makes the straddle an important strategy to understand but a very viable way to make money as an options strategist as well. * First let us define exactly what makes up the straddle, which is characterized as a delta neutral strategy. What does that mean? In a nutshell, a delta neutral type of strategy implies that a position has a ratio of short and long positions that balance out to an overall position delta of zero. With delta being the amount by which the price of an option changes in every dollar move in the underlying instrument. * A straddle from the long side is comprised of purchasing simultaneously an at-the-money call and an at-the-money put with identical strike prices and expirations, on the same underlying stock or index. The straddle is an ideal strategy to put on when operating in such a volatile market like we have today and especially when a trader does not have a built in market directional bias. Essentially you are just looking for action and the direction of the market move does not matter. * It is important when looking for a good straddle candidate to locate a stock or index that currently is exhibiting low implied volatility but a large volatility increase is anticipated. This could range anywhere from earnings announcements, new product launches, trade show event, and/or the release of some major economic reports. The maximum risk for the straddle position is limited to the actual net debit paid to enter into the position. * The straddle strategy has an unlimited maximum reward to the upside and of course is limited always to the position hitting zero to the downside. But the real beauty of this delta neutral type strategy is that profits can be garnered if there is sufficient market movement regardless of market direction. The upside breakeven is calculated by adding the net debit paid to the at-the-money strike price. The downside breakeven can be figured by subtracting the net debit paid from the at-the-money strike price. * Some other tips or techniques to keep in mind when choosing straddles include looking for price consolidation with the underlying along with a low implied volatility reading as mentioned earlier. Also, even though the stock is showing little volatility now make sure it has demonstrated high volatility in the past especially around any major news events such as earnings and other similar type of announcements. This often times requires the trader to explore past price trends by reviewing price and volume charts over the past year. * In addition, make sure the options on the underlying stock are liquid enough to trade effectively. Liquidity helps a trader get in and out of a straddle position without incurring too much slippage. When selecting which expiration months to use select months that still have at least 60 to 90 days until expiration. If the cost is not too great you can continue to go out as far as possible if the breakeven points along with the risk profile are still reasonable. In fact, straddles can even be done on LEAPS, but usually the premiums are so high that the underlying would have to make a very large move before the position would show a profit.
Take a look at the straddle position because, by strictly adhering to the selection rules, I think you will find it a very profitable technique. Given where the market is now, with no clear direction and the inherent volatility around the world, the straddle is an ideal strategy to employ, especially with its favourable risk-to-reward ratio ======================================= http://www.australiansharetrading.com/ the complete online resouse for share trading Please use this aricle, you have my prior consent to do so, just don't change a thing.australian share trading By Nik Halik => http://www.australiansharetrading.com offers share trading news ===========================================
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