Options Corner
In this straddle strategy you have taken in a much larger premium - 360 pts versus 95 but the breakeven levels are closer (5140 & 5860 - being the strike price plus the premium receipt). Again, the immutable investment law of risk & return rears its head - your premium receipt is higher, but the risk of the strategy expiring outside of the range (and hence losing you money) is higher. You would sell a straddle as opposed to a strangle if you believed that the market/underlying instrument was more likely to remain relatively static. Also, with the straddle you have to pay heed even more of the level of volatility — you certainly would not ordinarily sell a straddle if volatility was low.
92 | www.financial-spread-betting.com | July 2012
The beauty of straddles and strangles is that they are very versatile. For example if you are long an instrument and you (a) do not expect it to go much higher and (b) would also be prepared to add to your position at lower levels, then selling one of these strategies achieves this for you; i.e. if the market goes up then you lock a profit on the call sale and subsequent exercise side, yet if the market goes down, then the combined premium less the Put upon level reduces your entry cost. Next month we will look at how buying straddles and strangles can potentially work for you.