13. Long Straddle

Scenario:

This trader looks at the low implied volatility and feels that options are relatively inexpensive. The expectation here is that this market is poised for a big move. However, the trader is not sure which way it will be. So a decision is made to buy both a call and a put.

Specifics:
Underlying Futures Contract:	May Feeder Cattle
Futures Price Level:	81.00
Days to Futures Expiration:	20
Days to Options Expiration:	20
Option Implied Volatility:	8.4%
Option Position:	Long 1 May 82.00 Call	- 0.25 ($110.00)
	Long 1 May 82.00 Put	- 1.25 ($550.00)
		- 1.50 ($660.00)

At Expiration:
Breakeven:	Downside: 80.50 (82.00 strike - 1.50 debit). Upside: 83.50 (82.00 strike + 1.50 debit).
Loss Risk:	Losses bottom out at 82.00 strike with a maximum loss of 1.50 ($660).
Potential Gain:	Unlimited; gains begin below 80.50 breakeven and increase as futures fall. Also, gains increase as futures rise past 83.50 breakeven.

Things to Watch:

This is primarily a volatility play. A trader enters into this position with no clear idea of market direction, but a forecast of greater movement (risk) in the underlying futures.

Follow-up Trading Strategies