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Understanding Options 2E, 2nd Edition by Michael Sincere

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20

Buying Straddles and Strangles

If you have a good reason to believe that the underlying stock will make a big move in either direction (up or down) and are willing to bet on that happening, then the straddle might be what you’re looking for.

For example, let’s say that you know that an earnings report, a drug test result from the FDA, or a Fed announcement is pending. Any of these events could move the market or your stock. The problem is that you don’t know if the results will be good or bad. With the straddle, you can potentially make money no matter which way the stock moves. You are speculating on how big the price change will be, but you don’t care which direction. Sounds great, doesn’t it?

To take advantage of the anticipated move, you ...

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