Stock Forex

By definition, a straddle is writing (selling) a call option and a put option on the same stock with the same strike price and expiration date. In the sameness is the simplicity. The same stock. The same number of contracts (call and put). The same strike price. The same expiration date. Notice that I am selling both a call and a put, which generates money into my account from both sales. Though it is not exactly doubling my cash in, it does come close to doing that.

There are some potentially expensive risks, however. This is not a strategy for everyone. If the stock suddenly makes a big move in either direction, I could be caught. Remember, I haven’t bought any stock and I have sold someone the right to force me to sell the stock to or buy stock from them.

If the stock goes up and I get called out, I will have to buy the stock (in order to sell it). Since the stock went up, the person who bought the put option (who was betting that the stock would go down) is not likely to exercise his or her option. This is because he or she can sell their stock for more on the open market than they could force me to buy it for. The put option will expire.

If the stock goes down or stays under the strike price, I don’t have to worry about being called out because the person who bought the call option from me can buy the stock on the open market for less than they would have to pay if they exercised the option and bought the stock directly from me. The person who bought the put, however, can force me to buy his/her stock for the option price.

This is not a loss. I am simply paying more for the stock than I might have. What I get when I sell the stock will determine whether I have a gain or loss. The money I received from selling the options will offset the difference between what I paid and what I sold the stock for.

Before I write a straddle, I spend a lot of time with my broker evaluating what the cash flow will be and what the risk of loss could be. I won’t typically write a straddle unless the risk potential and the cash flow is substantial. You’ll need to make your own decisions in this area. Most of the time, the stock stays close to the strike price and both options expire leaving me with all the money. Occasionally, one of the options will be exercised and I’ll have to give back some of the premium I received from selling the options, but I get to keep most of it.

You can’t always tell where the your business is going without any help from the experts. You could use forex trading signals to help you make the right decisions.