The straddle strategy is constructed by buying two call options and put options with the same expiration date and the same strike price, and when the stock price rises sharply, the call option can be profitable, and the put option is in a state of out-of-the-money state. When the stock price falls sharply, the put option can be profitable, and the call option is in a state of out-of-the-money; The strategy is profitable when the stock price fluctuates more than the cost of construction.
The Straddle strategy is the most commonly used method of combining options. At the same time, the buyer can construct the strategy with the same strike price, the same expiration date, call options and put options of the same stock, and its profit and loss status is shown in Figure 7.9. The strike price is represented by E. If the stock price and strike price are almost the same on the expiration date of the individual stock option, the loss of the straddle option is inevitable. But if the stock price is greatly offset in any direction, there will be a big profit. Table 7.2 calculates the profit and loss of the option strategy.
In the Hong Kong stock trading rules, when investors expect a major change in the stock price but do not know which direction they are moving, then use a straddle option strategy. If a company is going to be merged and acquired, it seems natural to carry out the company’s stock straddle option strategy. If the merger is successful, a sharp rise in stock prices can be expected. Instead, a sharp decline in stock prices can be expected. But in practice, investors also need to consider that when the stock price is expected to jump and change sharply, the option premium of the stock will be much higher than the option price of similar stocks with little expected price change.
We call the straddle option in Figure 7.9 a bottom strad-die or a buyer straddle purchase. The opposite is true for a Top Straddle or Sell Straddle Write, where both call and put options with the same strike price and the same expiration date are sold. This is a high-risk strategy. If the stock price is close to the strike price on the expiration date, a large profit will be generated. However, once a stock moves significantly in any direction, its losses are unlimited