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Without knowing how much background you have a simple summary would be: A Straddle is a strategy that allows you to bet that a stock's price will change by x%
by CSMastermind 4y ago
Without knowing how much background you have a simple summary would be:
A Straddle is a strategy that allows you to bet that a stock's price will change by x% by a certain date. To make money on a straddle you want the stock to go up or down by more than that percentage, the more it changes the better.
So if you believe that the matter will be resolved one way or the other by whatever date then you'd want to buy a Straddle on that date. Regardless of what happens if there is resolution by that date you'll make money.
A Strangle is the same thing but allows you to bet directionally which way the stock will move. So if you're confident the matter will be resolved by a certain date then you can buy a strangle for that date and weight it depending on the outcome you think is most likely (say if you're 60% confident the court will for Elon to pay the agreed upon price you can weight the strangle 60% towards the upside). Like the straddle as long as there is resolution you'll get paid regardless, but here you get a bigger payout if you guess the direction correctly.
Both of these can be inverted with short straddles and short strangles.
This is what you would want to purchase in the case you're talking about. If you're confident that the Twitter matter won't be resolved for a month then you can purchase a short straddle for a month from now at whatever range you feel comfortable better the twitter stock will stay between.
A short strangle would allow you to do the same but with the boundaries weighted one way or another. So instead of just saying "it won't move more than x% either direction". It allows you to say, "a month from now it will be between $x and $y" where x and y can have a different distance from the current price.
- sterlind 4y agohow do you actually trade complex options like this? E-Trade or Robinhood or something? I'm sure I could get myself in a whole heap of trouble trading options, but it looks fun..
- CaptainZapp 4y agoActually less trouble than short selling, where the loss, in theory, is unlimited. On options losses are capped to the money invested. Nevertheless, you should consider that a host of professional traders with much better equipment and connections are betting against you.
- Majromax 4y ago> On options losses are capped to the money invested. On long options -- a purchased call, purchased short, or a combination -- then losses are capped to the money invested. On short options, losses are potentially unlimited. Understanding the difference is obviously extremely important. > Nevertheless, you should consider that a host of professional traders with much better equipment and connections are betting against you. I'd rather suggest that professional and sophisticated traders are arbitraging against you. Options market makers are not usually in the business of taking a directional stance -- they don't care one way or the other about whether Musk will buy Twitter. Instead, they seek to sell you the option but buy back the risk more cheaply, beginning with dynamic hedging that is impractical for a single retail investor with limited capital.
- SamReidHughes 4y agoYes, and if you have a tight bid/ask spread, that means there is a professional trader that agrees with you, just at a slightly different price.
- FabHK 4y ago> On short options, losses are potentially unlimited. On a short call, your loss is unlimited. On a short put, it is limited to the strike price, because the stock price can't go negative.
- CSMastermind 4y agoYes. You can trade options like this using pretty much any brokerage including E-Trade and Robinhood. TD Ameritrade, Fidelity, Charles Schwab, etc. I'd steer you away from Robinhood, not just for the sake of the meme culture that's developed around it, but because other platforms generally have better research tools and support. With all of that said, jumping straight into options trading is a big leap to take and with active investing in general I'd encourage you to look at it not as 'investing' but as gambling. If you're doing it for fun that's all good just don't bet more than you can afford to lose.