Straddle

If you can’t decide whether to be a bullish or bearish, here’s a strategy for you. You do have to decide one thing and that is whether the stock is going to make a big move or stay in a small range of prices. The straddle is neutral regarding the direction of the move.

The straddle is a call option and a put option in the same stock at the same strike price with the same expiration date. If you think the price is going to move a long way from its current levels, you buy the call option and the put option, which is called a long straddle, and your total downside risk is the premium paid for these. One of them expires worthless, and the other makes you a profit any time the stock moves up or down by more than the premium cost.

The alternative is a short straddle, which you would take out if you thought the stock was not moving much. This is the opposite position, where you sell both the call and the put. Your profit is limited to this premium, and your downside can be unlimited if the stock price changes. You will have to pay out on either the put or the call however much the price moves.

Strangle

This is very similar to the straddle, but it has different strike prices for the call and the put. This makes it cheaper to trade, but your maximum loss, the premium paid, will happen for the range of prices from one strike price to the other. As with the straddle, you can also take the short position and receive premiums. The premiums you get will be less, but you will get the full amount over the range of prices from call to put.

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