March 27, 2009

Straddle Strategy

Decisions ! and more Decisions ! We are faced with so many of them in our day-to-day lives. Whether a decision is good or bad depends on some future outcome. Everyone wants to make a "correct" decision. So how to go about making a correct decision NOW?

I believe, the uncertainity in the minds of a common investor about the economic situation world-wide is at its highest level ever since. Should we buy a stock now or wait until Election Results? Is it worth investing in real estate now or wait for further softening of mortgage rates? For an investor in a stock market, i would suggest playing with a "STRADDLE" strategy in these turbulent times.

Simply put, Straddle = Position 1 + Position 2 (opposite of 1) on the same asset. If your Winning Position "Wins" more than the "Loss" on your Loosing Position, you stand to gain irrespective of the direction of the stock market. If you incur a "Loss" , it is surely off-set with some definite positive values of "Win". With this double-sided strategy, your losses are thus quite less.

Consider This : Straddle on Stock Options. which is nothing but a "long put" option position and a "long call" option position. This means you purchase both a call and a put option on the same stock. As most of you would agree, there are only 2 possible outcomes of future value of a stock price : either UP or DOWN from the current price .

1. If Stock price goes up, Call option Wins and Put option Looses
2. If Stock price goes down, Put option Wins and Call option Looses

Remember that "Looses" here means only the option price paid by the investor for buying the option on the stock (which is much less than the stock price itself) thereby limiting the loss.

To sum-up, i believe that a STRADDLE option strategy in volatile markets can bring in good gains irrespective of stock/market movement.

My advice:
NEVER bet on stock price direction. Bet on a fool-proof Investment Strategy to minimize your losses !

2 comments:

online futures trading said...

It is very useful and valuable strategies and recommendation for everyone who are in stock market.I really apprecaite this blog and i got some good strategies and points from here.
Thanks for sharing

Makarand Prabhune said...

Thank You !