This kind of strategy takes advantage of stocks with high volatility. This strategy is more expensive than simply buying “put” or “call” options, but then again, do not forget that by using the straddle strategy you are buying insurance against a large move in either direction.
The best time to apply that kind of strategy is during earnings season. This is the time when companies report their quarterly earnings. Any newsworthy report that affects your chosen stock provides potential for a good straddle trade. The trick of getting into a good straddle trade is to buy your options while volatility is relatively low, and then sell as volatility increases either just before a news report or soon after one.
There are many advantages to the straddle strategy:
- you can profit from this trade if the stock moves in either direction
- the potential profits can be huge on both the upside and the downside
- your maximum loss is limited to the cost of your position
- if volatility is low when you purchase the options, and rises, both options can profit without much change in the option price
Have in mind that, there is always a chance that the stock moves nowhere, and volatility drops to nothing,this means that you lose. Just like with any other strategy, traders should remember that even the best strategy can fail and that there always is a risk. So, if the straddle strategy worked for someone else, this does not mean that it will work for you as well.
The information in this analysis is collected from different sources and should serve for informative purposes only. The author shall not be held responsible for the validity of the presented information. No part of this analysis recommends the purchase or sale of a currency pair or any other financial instrument.