Option Strategy Explanation 04|Profitable option Strategy Regardless of Price movements

Hello.

Today, we are going to learn about a profitable option strategy that can make money regardless of whether stocks rise or fall in the future: The straddle option strategy.

This strategy not only satisfies two different market scenarios: Oscillation expectation and Breakthrough expectation, but also helps us maintain strict risk control.

It is a secret weapon for options traders.

1. What is Straddle Option Strategy?

The Straddle option strategy involves simultaneously buying/selling call and put options with the same expiration date.

Based on the difference in strike prices between the call and put options, we can further categorize it into a Straddle or a Strangle strategy. Depending on the direction of the trade, it can be classified as Long Straddle, Long strangle, Short Straddle, Short strangle.

The Long Straddle and Long strangle strategies are primarily suitable for expected volatility, while the Short Straddle and Short strangle strategies are more applicable for expected breakouts.

1. Oscillation expectation

If you anticipate the future stock price to exhibit a range-bound trend with minimal fluctuations, you can consider using the Short Straddle strategy. This involves simultaneously selling call and put options with the same strike price. As the seller, your main source of profit will be the option premiums received. As long as the stock price remains relatively stable without significant volatility, the seller has a high probability of making a profit.

For example, let's consider Tesla, which currently has a stock price of around $256. You can choose to sell a call and put option with a strike price of $255, expiring on June 23rd, and collect a combined premium income of $18.11 ($10.10 + $8.01). As long as the stock price fluctuates within the range of $236.89 to $273.11 (255 ± 18.11), this strategy will be profitable.

The only risk is that if the stock price fluctuates too much and exceeds the profit range of selling the straddle strategy, a loss will be incurred at this time.

How to solve this problem? - We can use the short strangle strategy.

If we choose to sell the call option with a strike price of $265 and the put option with a lower strike price, the profit range will become larger, then the probability of the stock price jumping out of the profit range will also become lower, continuing the above example, if we choose to sell the call option with a strike price of $265 and a put option with a strike price of $250, the premium income is $11.8 (5.8+6), and as long as the stock price fluctuates between $238.2 and $276.8 (250±11.8), The strategies are all profitable.

It can be seen that compared to short straddle strategy, the profit range and probability of the strangle strategy will become larger and the risk will be lower. The only downside is that royalty income will be reduced.

2.Breakthrough expectations

If it is expected that the future stock price will be a breakout trend, there will be large fluctuations, in this case, you can use the long straddle strategy, so that the probability of one of the options is profitable.

We also take Tesla as an example. Contrary to the sell straddle strategy mentioned earlier, we can choose to buy a call option and put option expiring on June 23 at the strike price of $255, with a premium payout of $18.11 (10.10 + 8.01), then as long as the stock price fluctuation range jumps out of the range of 273.11 to 236.89 (255±18.11), the strategy is profitable.

The risk of this strategy is that the premium payout is too high, and when the stock price fluctuates little, the premium loss will occur.

Certainly, if there is a strong expectation of significant stock price volatility in the future and a desire to reduce the cost of the premium, you can employ a long-strangle strategy.

Similar to the opposite strategy of a short strangle, you can buy a call option with a strike price of $265 and a put option with a strike price of $250. In this case, the premium paid is $11.8 ($5.8 + $6), which is lower compared to the premium of $18.11 for a long straddle strategy, thus reducing the cost.

Furthermore, as long as the stock price fluctuates beyond the range of $238.2 to $276.8, this strategy will be profitable. In situations where there is a strong expectation of volatility and a desire to lower the premium cost, a long strangle strategy would be more suitable."

Alright, I've introduced four strategies to you today, and to summarize, they involve the simultaneous use of call and put options. Now, let's summarize the advantages, disadvantages, and use cases of these four strategies for everyone:

OK. If you want to learn more about options, feel free to follow our detailed course, "Introduction to Options." We will continue with further explanations.