Long straddle : Expecting large stock price fluctuations, buying both call and put options to gain profits when prices rise or fall.
Due to the two-way trading model, options trading has a variety of trading strategies, which is more flexible and also tests the investor’s strategy-making ability. You can start by understanding the basic four strategies.
1. Buying a Long Call Option
Buying a call option is one of the most popular trading strategies. It gives the option holder the right, but not the obligation, to buy the underlying asset at a specific price on or before the option expiration date. By buying a call option, the option holder believes that the price of the underlying asset (such as stocks, commodities, currencies, etc.) will rise, thereby gaining benefits when the price rises in the future.
For example, let’s say Company XYZ’s stock is currently trading at $100. You believe the company has good prospects and the stock price is likely to rise, so you buy a call option with an expiration date of three months in the future and a strike price of $110 for a premium of $3.
If XYZ stock rises to $120 before the option expiration date, you can exercise your call option and buy XYZ stock at $110 and sell it at the current market price of $120, earning $10 per share (minus the option premium you paid).
If the stock price of XYZ does not rise to $110 or above by the option expiration date, you will not exercise your option and you will only lose the $3 option premium you paid. Therefore, buying a call option has a fixed loss and unlimited gain potential.
Judgment basis: The market is bullish and profits can be earned from the rising prices of the underlying securities.
Profit and loss situation:
- Maximum profit: unlimited, derived from the difference in stock prices
- Maximum loss: option premium
- Breakeven point: Strike price + option premium
Volatility: An increase in volatility is positive, and a decrease in volatility is negative.
Time reduction: negative effects
2. Buy a put option (Long Put )
Buying put options is an ideal strategy for investors to profit from a decline in the price of the underlying stock.
Investors can buy this option contract to sell the underlying asset at a specific price at a certain time in the future. This option contract allows investors to earn income if the price of the underlying asset falls.
As an example, suppose an investor believes that a stock price will fall and wants to protect his portfolio from losses. The investor can buy a put option contract on the stock, which provides for the sale of the stock at a specific price at a specific time in the future.
