Do you know how to STRANGLE stocks with options? Suppose, the market is expecting a big announcement. Something like the interest rate change by the FED or a sudden bankruptcy of a big investment bank or a corporation. This announcement is going to move the market big. You want to profit from this big move in the market that is going to take place. But you don't know in which direction the market will move. Will the market like the announcement or will be react in a negative manner. You are not sure. Don't worry. You can still STRANGLE the market with this options trading strategy. STRANGLE is an options trading strategy that only needs a big move in the market no matter what the direction. A straddle is a combination position that involves purchasing a call and a put on the same underlying stock. You use the straddle strategy when you anticipate a big move in the market but are not sure about its direction. You construct a straddle by purchasing a call and put on the same underlying stock with the same strike price and the same expiry month. Using a straddle strategy can be highly profitable when scheduled reports like the earnings reports and company announcements are made plus when scheduled economic reports are released. The big move generally occurs when the reports are against the market expectations. The advantage of using a straddle is that it doesn't matter in which the move occurs as long as the market moves. Since a straddle is formed with two long options, your maximum risk is the premium you paid to buy the two options. The stock can move up or down for you to make a profit with the straddle. Suppose, the stock price goes down in the big way. The more it goes down, the more profit you make. You only need the stock price to go lower than the strike price minus the net options premium that you paid in order to make a profit from this downside move made by the stock. And in case the stock price goes up, the stock price must go higher than the strike price plus the net options premium that you paid for the put and the call. Your gain can be huge in case of a big upside move made by the stock. Your risk with the straddle is limited to the initial net premium you paid for buying the two options contracts. A strong move in the stock either up or down will result in a profit. Now a STRANGLE is very similar to a STRADDLE. The only difference is that you purchase the put and call with a different strike prices that are out of the money but the same expiry month.This way you can reduce your risk further but somewhat limit the potential reward too! It is up to you what type of options trading strategy you like to use!
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