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– Glenn Swanson
President
13. Long Straddle
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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
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