The Long Straddle, the Long Strangle, and the Vertical Debt Spread

02/29/2016 8:00 am EST

Focus: OPTIONS

Given many analysts predict 2016 to be a year marked by stock market volatility, Greg DePersio at Investopedia.com maps out four options strategies to take advantage of it, without having to guess the direction of movement correctly.

Thanks to panic in the oil markets, weakening economic activity overseas, and political uncertainty amid the upcoming election, analysts predict 2016 to be a year marked by volatility in the stock market.

Fortunately, several investing strategies capitalize on volatility. Best of all, with many of them, you do not even have to guess the direction of movement correctly. The only thing that matters is that the market moves and the more the better.

Use the following four options strategies to take advantage of market volatility in 2016.

Long Straddle

The long straddle involves purchasing a call option and a put option on the same stock. A call option gives you the option to purchase a stock for today's price at a future date. It becomes valuable when the stock goes up. A put option, by contrast, gives you the option to sell the stock for today's price at a future date. It becomes valuable when the stock goes down.

With the long straddle, the call option and put option have the same strike price. This is the price at which you have the option to buy or sell the security. If the stock jumps in price, your call option becomes very valuable. Meanwhile, your put option expires worthless. If the move is big enough, the gain from the call option more than offsets the loss from the put option.

If the stock falls, your put option becomes valuable and your call option expires worthless. Again, the bigger the fall, the more the gain from the put offsets the loss from the call.

Investors have used this strategy to log gains of 100% or more in short order during periods of volatility.

Long Strangle

The long strangle is similar to the long straddle, but you risk less money at the outset. As with the long straddle, you purchase a call option and a put option on the same security. The difference is the strike price. With the long strangle, your call option has a higher strike price and your put option has a lower strike price. To read the entire article click here…

By Greg DePersio, Contributor, Investopedia.com

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