You know a big move in the a certain stock is coming but you don’t know which direction to choose!
Many investors get a good feeling about a stock making a big move before an important date such as earnings or a new press release but aren’t exactly sure how the market will react.
In the past, I made the mistake of “guessing” the direction to the market but we all know that the stock market is extremely unpredictable.
In this article, I’ll show you exactly how to use the Long Straddle to nail a big options move without risking 100% of your initial investment in case you guess wrong.
Lonng Straddle Options Basics
The Long Straddle is an options strategy that works by buying a single call and single put at the exact same expiration date and strike price.
As long as the underlying stock makes a big move in either direction, you will profit nicely from the movement and hedge your losses by owning both a call and a put.
Long Straddle Advantages and Disadvantages
Using the long straddle is a more conservative strategy that works well with underlying stock volatility. Here are several advantages and disadvantages when using this strategy
- Profit from big moves in the market without guessing which direction a stock or ETF is heading
- Limit your downside risk by buying 2 separate options contract at the same strike price and expiration date
- Protect yourself from losing 100% of your initial capital in a single trade
- Limited profit if the stock doesn’t move at all and trades flat
- Guaranteed losses on either the call or put option if the stock moves aggressively in 1 direction
When to Use the Long Straddle
The goal is to profit from big moves in the market so I like to use the Long Straddle during volatile periods such as earnings season, upcoming elections, important dates surrounding a specific sector, and stock splits.