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13.  Long Straddle

MENU - Futures Strategy Guide

Contents Courtesy of CME.com

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

long-straddle-strategies

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MENU - Futures Strategy Guide

Contents Courtesy of CME.com