Chapter 4Straddles and Strangles

The straddle is one of the best known strategies in the options universe; however, it is also one of the most misunderstood and mistraded. Its attraction is that you can make a fast, significant profit without having to have any bias for the direction in which the stock price moves.

We’re looking for increased volatility but only once we’re in the trade. My preference is for that increasing volatility to be decisive in one direction or the other, but we’re not biased either way from the outset. In other words if volatility is forcing the stock upward, then we’d prefer the stock to continue rising, and if it’s forcing the stock downward, then we’d prefer the stock to continue falling.

Inevitably if the stock rises, ...

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