Regarding options trading, there are various techniques that traders can use to make a profit. Two of the most popular techniques are known as the straddle and strangle. This article will look at these two techniques and how traders can use them in Singapore options trading. You can try them out online through this site.
A straddle is an options strategy that involves buying both a call option and a put option on the same underlying asset, with both options having the same strike price and expiration date. This strategy aims to profit from volatility in the underlying asset. If the asset price moves significantly in either direction, then one of the options will likely end up being in the money, and the trader can exercise it for a profit.
A strangle is similar to a straddle, except that the strike prices of the call and put options are different. The trader will only make a profit if the underlying asset’s price moves significantly in either direction from the current price. If the asset price doesn’t move much, both options will likely expire worthlessly, and the trader will lose their entire investment.
When using either of these strategies, it’s essential to be aware of potential pitfalls. For instance, you will lose money when buying a call option, and the underlying asset price goes down instead of up. Similarly, if you buy a put option and the asset price goes up instead of down, you will also lose money.
How to use the straddle and strangle techniques
Choose a volatile asset
The first step when using the straddle technique is to find an underlying asset that you believe will be volatile. Traders can do this by looking at factors such as the asset’s price history, recent news events, and economic indicators.
Purchase your call and put options
Once you have found a suitable asset, you will need to purchase both a call option and a put option on that asset. With the straddle technique, these options should have the same strike price and expiration date. However, these options should have different strike prices with the strangle technique. The expiration date should still be the same for both options.
Wait for the price to move
You will then need to wait for the underlying asset’s price to start moving in either direction. If the price moves significantly in either direction, one of your options will likely become in the money, and you can exercise it for a profit.
However, with the strangle technique, if the price doesn’t move much, both options will likely expire worthlessly, and you will lose your entire investment.
Risks associated with straddle and strangle strategies
Limited profit potential
One of the risks associated with the straddle and strangle strategies is that your potential profits are limited because you can only make a profit if the underlying asset’s price moves significantly in either direction from its current price. If the price doesn’t move much, both options will likely expire worthlessly, and you will lose your entire investment.
Unlimited loss potential
Another risk to know about is that your losses can be unlimited. If the underlying asset price moves in the wrong direction, both options could be out of the money, and you would lose your entire investment.
Time decay
Another risk to be aware of is time decay, which is the tendency for the value of options to decrease as they approach their expiration date because there is less time remaining for the underlying asset’s price to move in the desired direction. This risk is particularly relevant when using the straddle technique, as both options will have the same expiration date.
Volatility
Volatility is another risk to be aware of when using the straddle and strangle strategies because these strategies rely on volatile underlying assets. If the asset doesn’t move much in price, both options will likely expire worthlessly, and you will lose your entire investment.
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