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Long Straddle, Short Straddle |
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Long Straddle
This strategy is both a Bullish & Bearish trade, forecasting explosive movement either way. The trader should purchase at the money or near money call and put option with the same strike price and with the same expiration date. This way, the trader can take advantage of any sudden movements in price regardless of direction. While the risks are limited, this should not be viewed as a low risk strategy because the trader is paying out for two options which are both wasting assets. However, the rewards of this strategy are potentially unlimited. Since the trader is buying options there is a net debit to enter the trade. The maximum risk in the position is equal to the net debit. By purchasing both a call and a put, there are both upper and lower break even points. A profit is realized if the stock rises above the upper break even, which has unlimited profit potential, or below the lower break even, which is limited from the lower break even point to zero. Decay increases as the options approach expiration. The position is adjusted to neutrality by frequent profit taking.
Short Straddle
This position is created when a trader sells the same number of call and put options at the same strike price and expiration date. This strategy is best used on a stagnant market. The short straddle strategy is dependant on the currency price staying at the set strike price of the options at expiration. The maximum profit in the position is equal to the net credit. By selling both a call and a put, there are both an upper break even point and a lower break even point. A profit is realized on the position if the stock stays between the upper and lower break even points. Advantages to this strategy are that if the stock remains at the original stock price, both of the options will expire worthless and the investor will keep both premiums, and if the stock price remains below the strike price, but above the lower break even point, the trader will still realize a profit. As for the risks, the trader can take a loss if the stock swings unexpectedly in one direction or the other due to unanticipated events. Because of the obligation to buy or sell currency that is not owned by the trader, the maximum loss for the trader can be infinite.
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| Symbol |
Rate |
| GBP:CHF |
1.747703 |
| GBP:JPY |
155.484239 |
| GBP:USD |
1.638403 |
| NZD:USD |
0.627050 |
| EUR:CAD |
1.545998 |
| EUR:CHF |
1.516857 |
| EUR:GBP |
0.867915 |
| EUR:JPY |
134.947096 |
| EUR:USD |
1.421994 |
| AUD:JPY |
76.394373 |
| AUD:USD |
0.805000 |
| USD:CAD |
1.087204 |
| USD:CHF |
1.066711 |
| USD:JPY |
94.899879 |
| USD:SEK |
7.613010 |
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Disclimer: This website is for informational purposes only and is not intended to provide
specific commercial, financial, investment, accounting, tax, or legal advice.
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© ForexCenter.com, 2005, All Rights Reserved
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History