Call And Put Options Definition - An Option Strategy to Make Money When the Market is Flat

Nov. 18, 2010 - PRLog -- Call And Put Options Definition

When writing this article I wanted to use a strategy that was simple to execute but effective. I wanted the strategy to be so simple that even traders just starting out could feel confident using the strategy to make money in a flat market.

I thought I would just start with a basic definition of what a call option is and what a put option is. Call options give the taker the right, but not the obligation, to buy the underlying shares. Put options give the taker the right, but not the obligation, to sell the underlying shares.

The strategy is called a long straddle and is known as a neutral strategy. A neutral strategy is used when the options trader does not know whether the underlying stock price will rise or fall. They are also known as non-directional strategies, because the profit does not depend on whether the underlying stock price will go rise or fall.

A straddle is a strategy that is profitable whether the price of the stock moves up or down. A long straddle put simply involves purchasing both a call option and a put option on the same underlying stock. The options are bought at the strike price with the same expiry. Get Internet #1 - Call And Put Options Definition @ http://tradingcure01.webs.com  and be Successful forever!

The trader of a long straddle earns a profit if the underlying price moves a long way from the strike price, either above or below. This position has a limited loss, the most a buyer can lose is the cost of both options. At the same time, there is limitless profit potential.

Say XYZ stock is trading at $40 in June. The trader moves into a long straddle by buying a July $40 put for $200 and a July $40 call for $200. The cost of the trade is $400, which is also the maximum possible loss.

If XYZ stock is trading at $50 on expiration in July, the July $40 put will expire worthless but the July $40 call expires in the money and has an intrinsic value of $1000. Subtracting the initial debit of $400, the long straddle trader's profit comes to $600.

On expiration in July, if XYZ stock is still trading at $40, both the July $40 put and the July $40 call expire worthless and the long straddle trader sustains a maximum loss which is equivalent to the initial cost of $400 taken to enter the trade.

I'm hoping this strategy will be as valuable to you as it has been to me! Get Internet #1 - Call And Put Options Definition @ http://tradingcure01.webs.com  and be Successful forever!

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