Harness Volatile Markets with Options Strangles and Straddles

Focus: OPTIONS

Options provide investors and traders with opportunities to profit no matter how the market moves, but many investors and traders do not understand how to trade them; Michael McFarlin, Marketing Analyst at The Options Industry Council, highlights two option strategies that can help you capitalize on market movements.

Investors love volatility – right until the point it moves in the wrong direction. As long as volatility is going where you projected, everything’s good. What do you do, though, when you expect a large move to occur, but don’t know which direction the market will move?

Enter options strangles and straddles.

There are a number of events that can create big moves in the markets, such as earnings reports, major economic reports or releases from the Federal Reserve. Each of these bring an element of uncertainty to the markets preceding their release. Often times, investors may expect a big move, but are unsure which way the markets actually will move. Rather than making a directional play, like buying or selling a security, investors can make a play on the volatility itself using options.

A direct way to use options to profit from volatility is a long straddle. This strategy involves buying one call and one put, typically using at-the-money options – both at the same strike price and expiration date. In a long straddle, it doesn’t matter which way the market moves, because as long as there is some motion, one of the two options will rise in value.