Volatile market trading strategies are appropriate when the trader believes the market will move but does not have an opinion on the direction of movement of the market. As long as there is significant movement upwards or downwards, these strategies offer profit opportunities. A trader need not be bullish or bearish. He must simply be of the opinion that the market is volatile.
A straddle is the simultaneous purchase or sale of two identical options, one a call and the other a put.
To buy a straddle is to purchase a call and a put with the same exercise price and expiration date.
To sell a straddle is the opposite: the trader sells a call and a put with the same exercise price and expiration date.
A trader, viewing a market as volatile, should buy option straddles. A straddle purchase allows the trader to profit from either a bull market or from a bear market.
Here the investors profit potential is unlimited. If the market is volatile, the trader can profit from an up or downward movement by exercising the appropriate option while letting the other option expire worthless.
While the investors potential loss is limited. If the price of the underlying asset remains stable instead of either rising or falling as the trader anticipated, the most he will lose is the premium he paid for the options.
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