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Binary options 360 review strategy
A short straddle gives you the obligation to sell the stock at strike price A and the obligation to buy the stock at strike price A if the options are assigned. By selling two options, you significantly increase the income you would have achieved from selling a put or a call alone. But that comes at a cost. You have unlimited risk on the upside and substantial downside risk. Advanced traders might run this strategy to take advantage of a possible decrease in implied volatility.
If implied volatility is abnormally high for no apparent reason, the call and put may be overvalued. After the sale, the idea is to wait for volatility to drop and close the position at a profit.
This strategy is only suited for the most advanced traders and not for the faint of heart. Short straddles are mainly for market professionals who watch their account full-time. In other words, this is not a trade you manage from the golf course. In fact, you should be darn certain that the stock will stick close to strike A. You want the stock exactly at strike A at expiration, so the options expire worthless.
Good luck with that. If the stock goes down, your losses may be substantial but limited to the strike price minus net credit received for selling the straddle. Margin requirement is the short call or short put requirement whichever is great , plus the premium received from the other side.
The net credit received from establishing the short straddle may be applied to the initial margin requirement. After this position is established, an ongoing maintenance margin requirement may apply. That means depending on how the underlying performs, an increase or decrease in the required margin is possible.
Keep in mind this requirement is subject to change and is on a per-unit basis. For this strategy, time decay is your best friend. It works doubly in your favor, eroding the price of both options you sold. That means if you choose to close your position prior to expiration, it will be less expensive to buy it back. After the strategy is established, you really want implied volatility to decrease.
An increase in implied volatility is dangerous because it works doubly against you by increasing the price of both options you sold. That means if you wish to close your position prior to expiration, it will be more expensive to buy back those options.
An increase in implied volatility also suggests an increased possibility of a price swing, whereas you want the stock price to remain stable around strike A. Options involve risk and are not suitable for all investors. For more information, please review the Characteristics and Risks of Standardized Options brochure before you begin trading options.
Options investors may lose the entire amount of their investment in a relatively short period of time. Multiple leg options strategies involve additional risks , and may result in complex tax treatments. Please consult a tax professional prior to implementing these strategies. Implied volatility represents the consensus of the marketplace as to the future level of stock price volatility or the probability of reaching a specific price point.
The Greeks represent the consensus of the marketplace as to how the option will react to changes in certain variables associated with the pricing of an option contract. There is no guarantee that the forecasts of implied volatility or the Greeks will be correct. Ally Invest provides self-directed investors with discount brokerage services, and does not make recommendations or offer investment, financial, legal or tax advice.
System response and access times may vary due to market conditions, system performance, and other factors. Content, research, tools, and stock or option symbols are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy.
The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, are not guaranteed for accuracy or completeness, do not reflect actual investment results and are not guarantees of future results. All investments involve risk, losses may exceed the principal invested, and the past performance of a security, industry, sector, market, or financial product does not guarantee future results or returns.
The Options Playbook Featuring 40 options strategies for bulls, bears, rookies, all-stars and everyone in between. The Strategy A short straddle gives you the obligation to sell the stock at strike price A and the obligation to buy the stock at strike price A if the options are assigned.
Both options have the same expiration month. Break-even at Expiration There are two break-even points: Strike A minus the net credit received. Strike A plus the net credit received. The Sweet Spot You want the stock exactly at strike A at expiration, so the options expire worthless. Maximum Potential Profit Potential profit is limited to the net credit received for selling the call and the put. Maximum Potential Loss If the stock goes up, your losses could be theoretically unlimited.
Ally Invest Margin Requirement Margin requirement is the short call or short put requirement whichever is great , plus the premium received from the other side. As Time Goes By For this strategy, time decay is your best friend. Implied Volatility After the strategy is established, you really want implied volatility to decrease.