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Advanced Options Strategies

Volatile Options Trading Strategies

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Buy Straddle

Buy Strangle

Short Butterfly

Buy Straddle

Expect prices to be very volatile

Strategy View
Investor thinks that the market will be very volatile in the short-term.

Strategy Implementation
Call option and put option are bought with the same strike price (a) – usually at-the-money.

Upside Potential
Unlimited Breakeven Point at Expiry
Lower point is the strike minus the two premiums paid, and the upper is the strike plus the two premiums.

Downside Risk
Limited to the two premiums paid. [If the investor would like to decrease the premium paid, a buy strangle might be interesting]

Margin
Not required

Comment
Position loses value with passage of time as time value decreases on options

Buy Strangle

Expect prices to be volatile

Strategy View
Investor thinks that the market will be very volatile in the short-term [this is similar to the buy straddle but the premium paid here is less]

Strategy Implementation
Put option is bought with a strike (a) and a call option is bought with a strike (b).

Upside Potential
Unlimited – should the market fall or rise greatly.

Downside Risk
Limited to the two premiums paid. [If the investor would like to reduce the premiums paid still further, a short butterfly might be interesting].

Margin
Not required

Comment
Position loses value with passage of time as time value decreases on options

Short Butterfly

Moderately expect prices to be volatile

Strategy View
Investor mildly thinks that the market will be volatile.

Strategy Implementation
Call option is sold with strike (b), two call options are bought with strike (a) and a call option is sold with strike (c). [A similar position can be created with puts].

Upside Potential
Limited to initial credit received.

Downside Risk
Limited to the difference between the lower and middle strikes minus the initial spread credit.

Margin
Required. All strategies involving short option positions require margin consisting of both the security deposit used for a spot trade plus the premium received

Comment
May be difficult to execute this strategy quickly.

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