A bullish investor who anticipates a rise in the underlying asset price may use a straddle strategyIt means buying both a call and a put option with the same expiration date and strike priceIf the underlying asset price rises, the call option will be in-the-money and increase value, while the put option will be out-of-the-money and lose valueIf the price falls, then the opposite will happen.
For example, if an investor buys a straddle on Google stock with a strike price of $800 and the stock price rises to $840, the call option will be worth $40 (at expiration), and the put option will be worth nothingIf the stock falls to $780, then the call option will be worth nothing, and the put option will be worth $20.
A strangle strategy is very similar to a straddle but uses different strike prices for the call and put optionsIt gives the investor more downside protection if the underlying asset’s cost falls and limits their potential profits if it risesThe benefits of strangle and straddle strategies are that they allow investors to profit from a rise or fall in the underlying asset’s price while limiting their losses if the price moves against them.
For example, an investor who buys a straddle strategy will have less potential loss than buying a call or a put option individually because the combined premium paid would be below the premium of buying a single optionTheir potential profit is limited to this price difference and not the total value of the call or put options.
What Are the Benefits of These Strategies?
The benefits of strangle and straddle strategies are that they allow investors to profit from a rise or fall in the underlying asset’s price while limiting their losses if the price moves against themThese strategies can be used in Australia and are often used when there is significant volatility in the marketThey can be used as part of a hedging strategy or take advantage of market opportunities.
What Should You Keep in Mind When Using These Strategies?
When using a straddle or strangle strategy, it is essential to remember that the options will expire on the same dateIf the underlying asset does not move in the desired direction, the options may expire worthless and result in a lossIt is also essential to choose an option with a high enough volatility so that there is a good chance that it will move in the desired direction before expiration.
When used correctly, straddle and strangle strategies can be a powerful tool for Australian investorsThese strategies can help investors limit their losses and generate profits in various market conditions by taking advantage of market volatilityIt is important to remember that these strategies involve risk, so it is essential to assess the potential risks and rewards before using them carefullyHowever, with a little bit of research and preparation, these strategies can be a great way to take advantage of market opportunities and grow your portfolio.
If you are looking to use a straddle or strangle strategy in Australia, make sure you know the risks involvedThese strategies can be expensive to set up, and if the underlying asset moves in the wrong direction, you could experience substantial lossesDevelop these skills to avoid huge losses.
In Conclusion
These strategies involve buying both a call and a put option with the same expiration date and strike priceIf the underlying asset price fluctuates, the options will increase or decrease in value, respectivelyIf the underlying asset price falls, the put option will be in-the-money and increase value, while the call option will be out-of-the-money and lose valueIf the price rises, then the opposite will happenIt can lead to substantial losses if the underlying asset moves against youIf you want to learn more— visit now.