Short straddle
A short straddle is an options trading strategy where an investor sells both a call option and a put option at the same strike price and expiration date. This strategy is typically used when the trader expects low volatility in the underlying asset, meaning they believe the price will remain stable.
Key Points:
Objective: Profit from low volatility; the trader aims for the options to expire worthless.
Maximum Profit: The premium received from selling both options.
Maximum Loss: Potentially unlimited, as the price can move significantly in either direction.
Breakeven Points: The strike price plus the total premium received (for the call) and the strike price minus the total premium received (for the put).
Risks:
The main risk with a short straddle is that if the underlying asset’s price moves significantly in either direction, the losses can exceed the premium collected, leading to substantial losses.
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Long Straddle
A long straddle is an options trading strategy where an investor buys both a call option and a put option at the same strike price and expiration date. The trader expects significant volatility, either upward or downward, in the underlying asset.
Key Points:
Objective: Profit from high volatility in either direction; the trader expects the asset price to move significantly.
Maximum Profit: Unlimited on the upside if the stock price rises sharply; limited on the downside to the stock price dropping to zero.
Maximum Loss: The total premium paid for both the call and the put options.
Breakeven Points:
Upper Breakeven: Strike price + total premium paid.
Lower Breakeven: Strike price - total premium paid.
Risks:
The main risk with a long straddle is that the underlying asset price remains stable. If the price stays close to the strike price, the trader will lose the entire premium paid.
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Bull Call Spread
A bull call spread involves buying a call option at a lower strike price and selling another call option at a higher strike price, both with the same expiration date. This strategy is used when the trader expects a moderate rise in the price of the underlying asset.
Key Points:
Objective: Profit from a limited upward movement in the underlying asset's price.
Maximum Profit: The difference between the two strike prices minus the net premium paid.
Maximum Loss: The premium paid for the spread.
Breakeven Point: Lower strike price + net premium paid.
Risks:
The maximum risk is limited to the premium paid for the spread, and profit is capped since gains are limited to the difference between the two strike prices.
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Bear Put Spread
A bear put spread involves buying a put option at a higher strike price and selling a put option at a lower strike price, both with the same expiration date. This strategy is used when the trader expects a moderate decline in the underlying asset’s price.
Key Points:
Objective: Profit from a limited downward movement in the underlying asset's price.
Maximum Profit: The difference between the two strike prices minus the net premium paid.
Maximum Loss: The premium paid for the spread.
Breakeven Point: Higher strike price - net premium paid.
Risks:
Like the bull call spread, the maximum risk is limited to the premium paid for the spread, while profit is capped based on the strike price difference.
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Iron Condor
An iron condor is a neutral options strategy where an investor sells both a call spread and a put spread with the same expiration date. This strategy is used when the trader expects low volatility and believes the price will stay within a certain range.
Key Points:
Objective: Profit from low volatility; the trader expects the stock price to stay between the two middle strike prices.
Maximum Profit: The net premium received from selling both spreads.
Maximum Loss: The difference between the strike prices of either spread minus the premium received.
Breakeven Points:
Upper Breakeven: The higher strike of the put spread + net premium received.
Lower Breakeven: The lower strike of the call spread - net premium received.
Risks:
The maximum loss occurs if the price moves significantly above the highest strike price or below the lowest strike price. However, losses are limited, and the iron condor can often be adjusted to manage risk.