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How the Straddle Option Mechanism Works in Trading

· Finance

For those who are into stock trading and have been doing it for years, they will have knowledge of numerous terms that could sound alien to the rest of the world. Forex trading too seems like a piece of cake to most, for its process is relatively simple-looking. However, in reality, this is also one of the regular trading mechanisms that only facilitate your success when you come along with a brilliant strategy to play along. If you aren't an expert in it, you can get experience in it, and only then start putting in big sums of money.

Straddle option strategy is one of the most popular strategies for trading in stock market. The traders who put their money on it spend money to acquire both call and put options, with the same strike price and having the same expiration date. This strategy may seem to give out neutral profits, but it is not so. As a matter of fact, this is also one of the safest and highest-paying trading strategies. It is usually applied when a trader knows nothing about what next to do, but know this for sure that the stock prices will move continuously and significantly for a while.

By doing so, when the prices of the either go up, the trader can exercise them right away, ignoring the other for the time being. This gets them an almost equivalent of their original investment, with the other side still in the kitty, waiting for the expiry date to come closer. So, regardless of which direction the stock moves, the straddle option trader will always end up making a profit.

In general practice, the two most popular straddle option strategies are:

  • Long Straddle: This straddle option strategy offers limited risk and unlimited profit. Because there is no time constraint, the buyer will have time at his side to determine when he should sell the stock for either call or put to make maximum profit, and then determine what to do with the next as the expiration date nears.
  • Short Straddle: This straddle option strategy is both risky and offers a relatively lower return on an investment. This is only applied when the trader is sure that the stock price will not fluctuate that much, which is possibly the only way to make some profit.

Besides, there are break even points as well, which ensure the investor doesn’t lose any money during their transaction.

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