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Glossary of Terms and Strategies for Options Trading
Complete Options Glossary: Strategies, Terms, Greeks, and Option Selling Techniques. Clear, concise, and suitable for both beginners and advanced traders. Learn to trade options effectively.
Strategy
Advanced, Speculation
Straddle
Strategy for large underlying movement, buying a call and a put at the same strike and expiration.
Detail
Straddle is a neutral option strategy where you buy a call and a put option with the same strike and expiration. You make money if the underlying moves significantly up or down. The strategy is ideal if you expect high volatility but don't know in which direction. It requires a higher investment because you are buying two options.
Straddle is a simple but expensive strategy, suitable for pre-announcement situations when a large market movement is expected. It profits from a significant movement of the underlying in both directions. A high IV increases the entry price, so it is advisable to enter at a lower IV. To be successful, the movement of the underlying needs to cover the costs of both options.
Optimal conditions
Expected significant movement (results, news, FED, court decisions), lower IV at entry (cheaper option).
Max profit
Unlimited when the underlying rises, very high when the underlying falls sharply (limited by the zero price of the underlying).
Max loss
Limited to the premium paid (call price + put price).
Risks
Loss if the underlying stays near the strike (insufficient movement). Higher entry cost. Negative Theta (time works against it).
Greeks
Delta neutral at opening, Theta negative (time value decreases), Vega positive (gain when IV increases).
Variations
Short Straddle (listing both options – very risky), Adjusted Straddle (different strikes).
Usage example
I expect a strong move in XYZ stock before the results. I buy a call and a put at strike 100 with the same expiration. Total investment $500. Profit increases with a big move.
DTE
Usually short-term (7–30 days) to take advantage of movement and minimize time loss.
IV (implied volatility)
Low IV is advantageous at entry. Higher IV increases costs, but also increases the potential for volatility to increase.
Premium
Debit position.
Margin
No additional margin, premium is paid for entry.
Notes
Very suitable for situations with the expectation of strong movement. It is necessary to monitor Theta (time loss). Works best with major news or events.
Tags
straddle, option strategy, big move, volatility, buying call and put, earnings, IV
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