Updated: Jan 8, 2019
Hi, to a novice, yes, it would seem that buying both a call option and a put option (a straddle) would produce a guaranteed win as you’re covered on both sides, yes?
But what happens if the stock goes nowhere when you’ve reached your expiration date?
You’ll lose on both sides, giving away a majority of the premium you paid to enter the trade.
To make it simple, let’s use an example.
The stock is at $50. You think it’s going to move big either way within three months.
You buy both a $50 call option and a $50 put option for $3 each for a total outlay of $6 ($600).
Three months later, the stock hasn’t moved and is still at $50. Both options will expire worthless and you just lost your $600.
Bottom-line, when you buy options, you better be darn good at getting the direction correct, the magnitude of that direction (how far it will move), and the timing of that move (expiration date).
Too hard in my opinion to make consistent profits as an option buyer.
That’s why I’ve been selling options profitably for 26 years and showing my readers how in our newsletter.
See my other post here about how our crystal ball helps us make smart decisions as option sellers.
Let me hear from you. Give me comments below and pass onto a friend.