Practice with our free options trading demo account here: http://bit.ly/Q72dYG For more of our free introductory options course, go here: http://www.informedtrades.com/f115/ VIDEO NOTES Hello and welcome. In this video, we look at our first Option strategy- the Long Straddle. A Long Straddle is trade that combines two options on the same stock, a Long Call and a Long Put, both with the same Strike Price and time of expiration. When placing a Straddle trade, usually the trader will choose an Option Strike Price that is at the money or close to at the money. In other words, a trader usually chooses a Strike Price for the Straddle that is as close to the current price of the stock as possible. This Long Straddle trade is taken when the trader feels that the price of the stock will make a significant move in price before the Options expire, but the trader is unsure of which direction the price will move. A trader places a Long Straddle, they are hoping that the price of the underlying stock moves enough in one direction, that the profit from one Option exceeds the loss on the other Option, resulting in a net profit on the trade. Let's look at an example using SLV, the silver ETF. At the time of making this video, SLV is currently $20.65 per share. Let's look at a Long Straddle trade using the $20.50 Strike Price for the Put and Call Options that expire in about a month. At the time of making this video, the $20.50 Call Option costs 79 cents up front, and the $20.50 Put Option costs 65 cents up front. For a Long Straddle, the trader buys both the $20.50 Call Option and the $20.50 Put Option for a total cost of $1.44 up front. This means that, for the trade to be profitable, the price of SLV must move more than $1.44 either above or below $20.50 before the Options expire in about a month. This places the break even points at $19.06 and 21.94, so for the trade to be profitable, the price of SLV has to move either below $19.06 or above $21.94 before the Options expire. Let's compare placing a Straddle to just buying the Call Option or the Put Option. If the trader buys just the Call Option, he is paying 79 cents a share up front for a Strike Price of $20.50. This means that for this trade to be profitable, the price of SLV has to rise, not just above $20.50, but above $21.29 to cover the cost of the Option. If the price does not rise above $21.29, then the trade loses money. If the trader buys just the Put Option, he is paying 65 cents a share up front for a Strike Price of $20.50. This means that for this trade to be profitable, the price of SLV has to fall, not just below $20.50, but below $19.85 to cover the cost of the Option. If the price does not drop below $19.85, then the trade loses money. If the trader buys places the Straddle, he paying $1.44 a share up front for Strike Prices of $20.50. This means that for this trade to be profitable, the price of SLV has to either rise above $21.94 or drop below $19.06. Comparing the Straddle to just buying the Call- the Call costs less up front and the price of SLV doesn't have to move as high for the trade to be profitable. However, the Straddle may also be profitable if the price of SLV declines, yet the Call can only be profitable if the price of SLV increases. Comparing the Straddle to just buying the Put- the Put costs less up front and the price of SLV doesn't have to drop down as much for the trade to be profitable. However, the Straddle may also be profitable if the price of SLV increases, yet the Put can only be profitable if the price of SLV decreases. Straddles are usually placed when a trader feels that the price of the underlying stock is about to make a significant move, but they are unsure of whether the price will move up or down. Sometimes traders will place Straddle trades in the days leading up to an earnings report or economic announcement hoping the results of the report or announcement cause the price of the underlying stock to move significantly in one direction. However, it is important to remember that during these times Implied Volatility increases. This causes an increase in the cost to buy the Options, meaning that, for the trade to be profitable, the price of the underlying stock must make a greater move in either direction. So that's the Long Straddle trade. In the next video, we will look at the Short Straddle trade. I hope that you enjoyed this video. Thanks for watching.
Visibility: 7851
Duration: 4m 57s
Rating: 44