Buy Straddle

Buy straddle is a breakout options trading strategy. In times when there is low stock volatility and a large unpredictable breakout move is expected, a successful trader might consider making a straddle buy. A buy straddle is implemented by purchasing a call option and a put option on the same asset with the same strike price and expiration date. Buy straddle can be an excellent strategy to use when the stock is poised for a breakout but the direction is unknown.

A buy straddle affords the investor limited investment risk, while offering an unlimited profit potential on a major move up or down. In such a strategy, the potential loss is limited to the premiums paid for the call and the put as well as commissions. A major move in either direction allows the investor to sell the opposite option and ride the one making the money, thus creating a highly successful trading situation.

When technical analysis indicates that a stock is trading in a triangle pattern, it is a prime target for a buy straddle. Frequently with this type of trading pattern an explosive move occurs near the tip of the triangle, but the direction of the move is not readily known. Since the call and the put cover both directions of movement, a reward is quickly realized in this maneuver. Once the direction is known, the other option is liquidated and the investor can ride the trend. At this point, it is important not to ride the trend too long since time decay works against the trade in this position.

When buying a straddle the put and the call that are purchased are either at-the-money or close to it. After identifying a triangle trading pattern with a tightening trading range, a position is initiated near the tip of the triangle. Because volatility is low, the options will be cheaper before a breakout occurs. Since this technique requires buying both a put and a call, buying before the spike is even more important. Straddle buying has excellent risk reward ratios since the actual risk is limited and the reward is potentially unlimited.

As with other stock option trading strategies there is risk, though limited, in a straddle buy. The actual purchase is more costly since both a put and a call are being purchased on the same option. If the option fails to break out before the expiration date of the call and put, the trader will lose money on the purchases. Decay is also a factor working against a buy straddle, but it is eliminated by initiating a position before the breakout and quickly selling the option on the wrong side.

A buy straddle is an excellent tool to use in a stable market when technical analysis indicates that a stock is ready to break out of a triangle trading pattern. In such a case, the trading range is very tight and the stock is likely to make an explosive move. Buy straddles create the potential for significant gains with limited risk of investment.

Be sure to also read about a buy strangle, another breakout options trading strategy used when trading stocks.

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Buy Strangle

A buy strangle is a breakout options trading strategy. It is used in times when there is low stock volatility and a large unpredictable breakout move is expected. A buy strangle is implemented by purchasing a call option and a put option on the same asset with the same strike price and expiration date. Because the stock is poised for a breakout but the direction isn’t known, buying a strangle can be an excellent strategy to use when trading stocks.

A buy strangle affords the investor a limited investment risk, while offering an unlimited profit potential on a major move up or down. In such a strategy, the potential loss is limited to the premiums paid for the call and the put, as well as commissions. It is very similar to a Buy Straddle, except that the investor is purchasing options that are out of the money, which makes the potential loss smaller because the options are less expensive to purchase. A major move in either direction allows the investor to sell the opposite option and ride the one making the money, thus resulting in highly successful trading.

When using technical analysis with candlestick patterns, and it indicates that a stock is trading in a triangle pattern, it is a prime target for a buy strangle. Frequently, with these types of stock chart patterns, an explosive move occurs near the tip of the triangle but the direction of the move is not readily known. Since the call and the put cover both directions of movement, a reward is quickly realized in this maneuver. Once the direction is known, the other option is liquidated and the investor can ride the trend. At this point, it is important not to ride the trend too long since time decay works against the trade in this position.

When Buying a Strangle, the put and the call options that are purchased are out-of-the-money. After identifying a triangle trading pattern with a tightening trading range, a position is initiated near the tip of the triangle. Because stock volatility is low, the options will be cheaper before a breakout occurs. Since this technique requires buying both a put and a call, buying before the spike is even more important. Strangle buying has excellent risk reward ratios since the actual investment risk is limited and the reward is potentially unlimited.

As with all stock option trading strategies, there is risk, though limited, in a strangle buy. The actual purchase will be more costly since both a put and a call are being purchased on the same option. If the option fails to break out before the expiration date of the call and put, the trader will lose money on the purchases. Decay is also a factor working against a buy strangle, but it is eliminated by initiating a position before the breakout and quickly selling the option on the wrong side.

A buy strangle is an excellent tool to use in a stable market when technical analysis tools indicate that a stock is ready to break out of a triangle trading pattern. In such a case, the trading range is very tight and the stock is likely to make an explosive move. A buy strangle is one of several investment options that creates the potential for significant gains with limited risk of investment.

In addition to free tutorials, videos, and live trading room hosted by Stephen Bigalow weekly, you  can access Steve’s daily market comments that provide insight into the markets. View member benefits for more information.

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Put Hedges

A Put Hedge is a bearish options trading strategy that requires buying puts during a bearish market to protect stock shares that while the trader is reluctant to sell, are vulnerable to a decline in the market. Successful traders utilize strategies such as the put hedge to insulate their portfolios from loss in a bearish market. This method also has the potential of unlimited profits while at the same time limiting the potential loss by the investor.

When a trader feels that their portfolio is exposed to a market decline, it is possible for the investor to have several options available to create a put hedge. If the trader feels his or her portfolio is sufficiently diversified, an excellent technique is to purchase index puts to protect the entire portfolio. To implement a put hedge, the investor needs to select an index that best represents his or her portfolio. If the trader has successfully identified a declining market, any losses incurred with the decline in assets will in turn be offset by the gains made as the value of the index puts, or put hedges, experience an increase.

In such a stock market strategy, the profit reward has the potential to be unlimited, since both the traders’ portfolio and put hedge could rise instead of fall. In this instance the investor can make money on the portfolio and the index puts minus the cost of the premium paid for the puts. If the technical analysis of the trader is correct and the market declines, the losses on the established portfolio will be limited because they will be offset by the gains realized on the put hedges that were purchased. These puts in turn have been successful, and the investor has created a put hedge which protected the trader’s portfolio in a bear market.

When the market turns or the investor once again has confidence in its stability, he or she can sell the index puts if they retain any value which gives the trader another avenue of profit. If the market index puts have expired, the trader will need to determine an appropriate course of action. If the market has truly turned, the investor can simply do nothing, since he or she no longer needs a put hedge to protect their stock portfolio. If the market is still bearish and unstable, then the trader will need to determine whether it is necessary to purchase an additional put hedge as protection against the stock market. If so, the method for this transaction will be identical to the original purchase.

As with any strategy in the stock market, it is important to analyze the expectations for the underlying asset and for the market before proceeding. Remember that this practice occurs during a bearish market, and the investor must realize that any strategy should be conservative and consistent with his or her stock trading plan. Whether using put hedges or buying out-of-the-money calls, it is important that the investor understands that the ultimate goal is to make money, as well as to protect the money already made.

Throughout his investment career, Stephen Bigalow has directed his investment acumen towards developing improved methods for extracting profits from the investment markets. His research, encompassing all fundamental and technical methods, resulted in verifying that Candlestick analysis was superior to any other method when evaluating stocks.

Japanese Candlestick trading signals consist of approximately 40 reversal and continuation patterns. All candlestick patterns have credible probabilities of indicating correct future direction of a price move.

In addition to Free tutorials, videos, and live trading room hosted by Stephen Bigalow weekly, you  can access Steve’s daily market comments that provide insight into the markets. View member benefits for more information.

 

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Bear Put Spread

A bear put spread is a bearish options trading strategy employed when the market is volatile and moderately bearish. In such instances an investor will look to make profitable trades that do not incur high risk. The bear put spread method, also known as vertical bear puts, is used by traders to realize profits when the market is looking to the money of the investor.

The profit and loss strategy for a bear put spread is very similar to a bear call spread. The bear put spread comes into play when a trader buys a put option on a particular stock that is out-of-the-money and sells an out-of-the-money put on the same stock. For this method both options should have the same expiration date. With a bear put spread, the trader does not immediately realize the net premium when establishing the position and must wait until the expiration date to see any profit. While the trader does not have money in hand, the profit potential is greater with a bear put spread.

While the bear put spread is riskier than a bear call spread, the potential for profit is greater than implanting the call spread. In a bear put spread, if the price increases above the in-the-money (higher) put option strike price at the expiration date, then the investor has a maximum loss potential of the net debit. Conversely, the maximum profit potential involved in a bear put spread occurs when the stock decreases below the out-of-the-money (lower) put option strike price. The maximum profit potential is limited to the premium collected for the calls sold less the cost of the premium paid for the calls that were purchased.

Traders will find more opportunities for profitable trading in a bull market; a bear market typically requires a trader to be more conservative in order to minimize risks and find trades that, while lucrative, are less risky. A Bear Call Spread is a perfect example of such a conservative move to create profits.

Throughout his investment career, Stephen Bigalow has directed his investment acumen towards developing improved methods for extracting profits from the investment markets. His research, encompassing all fundamental and technical methods, resulted in verifying that Candlestick analysis was superior to any other method when evaluating stocks.

Japanese Candlestick trading signals consist of approximately 40 reversal and continuation patterns. All candlestick patterns have credible probabilities of indicating correct future direction of a price move.

In addition to Free tutorials, videos, and live trading room hosted by Stephen Bigalow weekly, you  can access Steve’s daily market comments that provide insight into the markets. View member benefits for more information.

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Bear Call Spread

The bear call spread is a bearish options trading strategy that is used when the market is extremely volatile and moderately bearish. Due to the erratic movements in a bear market, an investor will in many instances, look to make moves that are profitable yet hold low risk. The bear call spread is also known as the bear credit spread.

When utilizing the bear call spread a trader sells a call option at one strike price and buys a call on the same asset, which is further out-of-the-money (at a higher strike price). In most cases, both options will have the same expiration date. The profit and loss strategy for a bear call spread is quite similar to a bear put spread; however with this technique the trader immediately receives a net premium when establishing the position. In a bear put spread, the premium is paid when the position is established. It is because of this difference that the investor already has money in hand at the inception of the bear call spread.

The bear call spread is lower risk than the bear put spread; however the profit potential is reduced as well. In a bear call spread, the risk is minimized because the investor purchases lower priced calls that provide protection if the price goes up significantly. Conversely, in a bear call spread, profit potential is limited to the premium collected for the calls sold less the cost of the premium paid for the calls that were purchased. As the name implies this strategy is used in a bearish market.

In general a bull market brings more opportunities for profitable trading. A bear market however, typically moves a trader into a more conservative approach of minimizing risks and finding trades that while lucrative are less risky. A bear call spread is a perfect example of such a conservative move to find profits.

Throughout his investment career, Stephen Bigalow has directed his investment acumen towards developing improved methods for extracting profits from the investment markets. His research, encompassing all fundamental and technical methods, resulted in verifying that Candlestick analysis was superior to any other method when evaluating stocks.

Japanese Candlestick trading signals consist of approximately 40 reversal and continuation patterns. All candlestick patterns have credible probabilities of indicating correct future direction of a price move.

In addition to Free tutorials, videos, and live trading room hosted by Stephen Bigalow weekly, you  can access Steve’s daily market comments that provide insight into the markets. View member benefits for more information.

 

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