How to buy options with straddles strategy.
Buy an ATM call and an ATM put with the same strike price and expiration date. Situations look for a market with low volatility about to experience for increase in volatility. Time decay effect detrimental.profit is unlimited because property required sufficient market movement but does not depend on market direction. Risk is limited to the net debit paid margin is not required. Upside break-even strike price + net debt paid. Downside break even is strike price minus net debt paid.buying a straddle consists of buying a call and put off the same strike weather of the index for stock when ASAP upward or downward movement is expected. It is a very expensive strategy the net debit can be large and each justified only win a move commensurate with that kind of debit is expected.
In India since there is a only a month of this strategy to work out it is important to wind it up once the particular news is announced, or equally if the expected move does not happen because that time value can eat away the premium very fast. Also since this strategy has become popular because people tend to buy straddles around the budget or around result announcements the implied volatility of the concerned option rise to very high level causing stress to lose some of their sheen. It is still remains Bible at high market level and in strong trending market where the markets move more than the Intex debit being paid.it can also be used if the volatility of the market diminishes coma and the market is about to break out in either direction.but because of the time factor commit readers should be very careful of paying the high premium involve.
Let's understand with Nifty examples
Assume the Nifty is trading at 11300 and a staff move is expected in either direction. The 11300 call is bought for rupees 52 and 11300 put is bought for rupees 48. So the break even for this straddle is is 100 points up or down. Above 11400 or below 11200 in such a case I would Book profit if I am getting 150 points on either sides. If the Nifty ends between 11200 and 11400 there will be loss with the maximum loss occurring at 11300.
If the Nifty and between 11200 to 11400 the loss would be 100. If the Nifty ends up at 11440 the profit would be (11440-11300)-100=40.
as it is a risky propose reason at most time trader have found variation of struggle to trade sharp moves.for example if a trader feels there is a 60% chance of a big SAR of move and 40% chance of the staff down move he can buy future and at the money put. This way he page the premium of only one leg and gets exposure in both direction.as the market moves in one direction one lake of this study can be covered while returning the other.
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