Bet on Growth Stocks? Learn about Straddle Strategy!

Earnings of growth stocks diverge greatly in this earnings season.

$Snap Inc(SNAP)$ shares dropped as much as 20%; $Cloudflare, Inc.(NET)$ plunged as much as 25% in after-hours trading Thursday; $Lyft, Inc.(LYFT)$ dropped 17%; $Upstart Holdings, Inc.(UPST)$ surged 50% yesterday.

The roller-coaster ride of growth stocks happens every day in this earnings season.

• How to profit from their divergence and wild ride?

• Straddle helps you profit from high volitility

Straddle refers to buying a combination of “call and put” with the same strike price and expiration date, with the strike price usually taken close to the current price (ATM).

The biggest advantage is

you don’t need to judge the direction of the stock movement but only bets on high volatility, which means that the underlying stock needs to be volatile enough so that the return on one side is greater than the cost on both sides.

The risk is

A long straddle option is more expensive than buying a single call or put option because it involves purchasing two options contracts.

If the market doesn't move as much as expected, you will lose your costs for buying two contracts.

A straddle example of $Upstart Holdings, Inc.(UPST)$

As we mentioned above, we often choose the current price of the underlying target. For $Upstart Holdings, Inc.(UPST)$, we choose $14.

The call and put contract of Upstart are $1.49 and $1.45 respectively. It means your costs are $2.94 = $1.49 + $1.45.

Volatility ratio you need = Premium/current price = 2.94/14=21%

If $Upstart Holdings, Inc.(UPST)$ rose above $16.94 or fell below $11.06, you will make money from the straddle contracts.

Currently, $Upstart Holdings, Inc.(UPST)$ is trading at $19.5, up 38%. So if you bought the straddle contracts yesterday, you would earn much.

What other growth stocks to bet? Look at our earnings calendar!