Options Investing Strategies - Straddles

Investing in the stock market is pretty complicated but what most individual investors find even more complicated is investing using stock options And that's really very unfortunate because stock options aren't as complicated as most people think they are, and certainly not as complicated as most financial newsletters or financial gurus, or even the government would have you believe.

In this article today I'm going to discuss one simple options strategy that you can use to profit that isn't very difficult at all and can be a lot of fun to play around with.

What strategy am I talking about? Well I'm talking about the straddle today and I don't mind saying so. Basically you use a straddle when you think that the stock of a company is going to move dramatically either up or dramatically down... but, you're not sure exactly which direction the actual stock is going to go!

If this seems like the perfect strategy for you, then you're my kind of person! But before you get too excited, this is not just some sort of catchall way for you to invest without any risk. It's a little different than that!

We're not talking about not knowing whether a stock will go up or down, what I'm talking about is not knowing if it will go up or down 'dramatically' and this will usually come about from some sort of event that you're not quite sure how the market will handle.

For instance future earnings may be severely affected by something; by some sort of specific event like say, a court ruling or the production of a new product that you're not quite sure how the market is going to react to. Or it may have something to do with certain government issues such as interest rates going up or down, or a decrease of certain natural resources that you see occurring sometime in the near future.


But enough generalities let's talk about this more specifically using an example. Let's pretend that a company stock currently trades at about $30 a share and let's also pretend that there is about to be a court ruling that will drastically affect the company and its future earnings. Maybe it's a court ruling on a patent infringement that will or will not allow the company to sell a certain line of its products in the future. Whatever.

So you're not sure whether the stock is going to shoot up or drop down so you buy a $30 put option and a $30 call option. Let's also pretend that it cost you five dollars to purchase each of those options. That's five dollars for the put option and five dollars for the call option for a grand total of $10 that you have spent on this hedging strategy.

Now if the companies stock goes above $40 or below $20 before your options expire (both the put and call), you will make yourself a profit.

And there you have a simple option strategy to save yourself from massive swings in stock price based on events that you're not quite sure how they will pan out in the future. Go forth and invest with confidence once again!