Strategies in Trading Options Contracts (Part 6)

In previous Q&A issues, readers have learned about popular trading strategies in Option Contracts, to create differences in profits as well as price insurance. In today's Q&A issue, Cong Thuong Newspaper will continue to help readers understand more about trading strategy number 6, "Long Straddle Strategy".

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Long Straddle Strategy

The Long Straddle strategy is implemented by simultaneously purchasing a call option and a put option on an underlying asset with the same strike price and expiration date. This strategy has the potential to bring unlimited profits, on the other hand, allows investors to limit their losses to no more than the total premium of the two options. On the expiration date, the smaller the difference between the market price of the underlying asset and the strike price of the option, the lower the investor's profit. And conversely, the larger the difference, the higher the investor's profit. Therefore, the Long Straddle strategy will be very beneficial for investors if the market has factors that cause the underlying asset price to fluctuate sharply up or down.

For example, an investor implements a Long Straddle strategy by simultaneously purchasing a December 2024 corn contract (ZCEZ24) call option with a strike price of 460 cents/bushel for a premium of 45 cents/bushel and purchasing a put option with a strike price of 460 cents/bushel for a premium of 25 cents/bushel.

The profit from the Long Straddle strategy depends on the price of the future Corn contract December 2024. The following scenarios are possible:

Case 1: ZCEZ24 contract price is 460 cents/bushel higher

If the ZCEZ24 contract price is above 460 cents/bushel, say 550 cents/bushel, the investor will exercise the call option to buy 1 ZCEZ24 contract at 460 cents/bushel and sell this contract immediately at 550 cents/bushel. At this time, the investor receives a profit of (550 – 460) - (45 + 25) = 30 cents/bushel.

Case 2: ZCEZ24 contract price falls below 460 cents/bushel

If the ZCEZ24 contract price is below 460 cents/bushel, say 430 cents/bushel, the investor will exercise the put option to buy 1 ZCEZ24 contract at 460 cents/bushel and buy back 1 ZCEZ24 contract at 410 cents/bushel. At this time, the investor's profit is (460 – 430) - (45 + 25) = -40 cents/bushel, meaning the investor suffers a loss of 40 cents/bushel.

Case 3: Contract price ZCEZ24 is exactly 460 cents/bushel

The investor does not exercise either option. The investor suffers a loss equal to the total premium of the two options, i.e. (45 + 25) = 70 cents/bushel.

Thus, the Long Straddle strategy will help investors limit their losses to no more than the total premium of the two options and bring unlimited profits. The profits and losses of investors using this strategy depend entirely on the volatility of the underlying asset's market price: the more volatile the underlying asset's market price is and the greater the difference from the option's strike price, the greater the investor's profits.

Source: https://congthuong.vn/hoi-dap-giao-dich-hang-hoa-so-71-cac-chien-luoc-trong-giao-dich-hop-dong-quyen-chon-phan-6-339028.html