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Options Made Easy: Your Guide to Profitable Trading, Third Edition by Guy Cohen

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Chapter 8. Two Basic Volatility Strategies

What if you’re not sure about the direction of a stock, but you feel sure that it’s going to move significantly in one direction or another? Trading options gives you the ability to make low risk-high reward without getting the direction right! The two strategies we discuss in this chapter are straddles and strangles, which are both direction-neutral strategies.

Straddles

The straddle involves the following steps:

Step 1 Buy at-the-money (ATM) strike puts.

Step 2 Buy ATM strike calls with the same expiration date.

This is a net debit transaction because you are paying for equal numbers of calls and puts. As such, the straddle is an expensive strategy in terms of a cash requirement. However, if you ...

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