It's a relatively low-risk strategy, since the maximum loss is limited to the premium paid for buying the option, while the maximum reward is potentially limitless. Although, as stated above, the chances of a trade being very profitable are usually quite low. In the P&L graph above, notice how the orange line illustrates the two equilibrium points. This strategy becomes profitable when the stock price, whether higher or lower, has a significant movement.
The investor doesn't care in which direction the stock moves, only that it moves enough to place one option or another in the money. It must be higher than the total premium that the investor paid for the structure. Strangulars will almost always be less expensive than straddles because the options purchased are low-cost options. Trading during earnings season generally means that you'll encounter greater volatility with the underlying stock and, generally, you'll pay an inflated price for the option.
As a result, options trading can be a relatively inexpensive way to speculate on a wide range of asset classes. When trading options, you pay a premium in advance, giving you the option to buy these hypothetical stock options or to sell the stock options at the designated exercise price before the expiration date. Buying OTM call options seems like a good starting point for new options traders because they are low-cost. If you plan to buy an option during earnings season, an alternative is to buy one option and sell another, creating a margin.
Trading options can be an excellent strategy for diversifying your portfolio, limiting risk, and generating profits when executed well. To make money with options trading, you'll need to set price alerts and keep a close eye on the market to see when your trade becomes profitable. It's best to have a fairly solid understanding of trading under your belt before diving into options. In fact, if you're not careful, you're much more likely to lose trading options than to get rich.
When you're ready to start trading options, start small and you can always try more aggressive options strategies in the future. And you'll need to consider the risks and trading fees that can be added to various options strategies. Your broker may have additional requirements, such as disclosing your net worth or the types of options contracts you intend to trade. An option has a fixed life, with a specific expiration date, after which its value is liquidated among investors and the option ceases to exist.
Options traders should actively monitor the price of the underlying asset to determine if they have money or want to exercise the option. And you won't be able to force the trade unless you offer to buy back short options at a price that makes it worthwhile for the imbecile on the other side.
