How you sit on a pony.
Also, a strategy in options trading.
Calls are options that make money when the price of the underlying asset goes up. Puts become profitable as the price of the asset declines. But there's a third direction the price can go: sideways. It may seem boring to bet on a stock holding to a tight range...a bit like betting on a snail race. But the short straddle is designed to take advantage of just that sort of move.
A short straddle is made by writing (selling) both a call and a put for the same underlying asset. Both contracts have the same strike price and expiration. The bet pays off if the asset's price sticks to a narrow trading range.
The investor receives premiums for selling the options contracts, which represent the profit from the transaction. The investor hopes that both contracts expire without being exercised. Then they get to pocket the premiums they received and move on with their lives.
However, short straddle strategy is risky. While it comes with a limited upside (just the premiums received), the downside is fundamentally unlimited. A big move in the price of the underlying asset, and the investor could lose large sums of money.
Related or Semi-related Video
Finance: What Is a Call Option?25 Views
finance a la shmoop. what is a call option? option? option, where are you? okay
yeah yeah. not phone options, call options. and a close but no cigar. a call option [man smokes in a tub of cash]
is the right to call or buy a security. the concept is easy the math is hard.
you think Coca Cola's poised for a breakout as they go into the new low
calorie beverage business. their stock is at 50 bucks a share and you can buy a [man stands on a stage as crowd cheers]
call option for $1. well that call option buys you the right
to then buy coke stock at 55 bucks a share anytime you want in the next
hundred and 20 days. so let's say Coke announces its new sugarless drink flavor
zero it's two weeks later and the stock skyrockets to fifty eight dollars a
share. you've already paid the dollar for the option now you have to exercise it. [man lifts weights]
so you buy the stock and you're all in now for fifty five dollars plus one or
fifty six bucks a share and your total value is now fifty eight bucks. well you
could turn around today and sell the bundle that moment, and you'll have
turned your dollar into two dollars of profit really fast. and obviously had the [equation on screen]
stock not skyrocketed so quickly well you would have lost everything. still you
lucked out and now you're sitting on some serious cash, courtesy of your call [two men in a tub of cash]
options. as for Coke flavor zero turned out to be nothing more than canned water.
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