The Index Strategy Workshop is designed to index individuals in learning about various index option strategies. These discussions and materials are for educational purposes only and are not intended to provide investment advice. For the sake of simplicity, taxes, commissions and other trading costs have been omitted from the discussions and strategies.
These should be taken into account when making investment decisions. These strategies are based on hypothetical situations involving a European-style, cash-settled index and should only be considered as examples of potential trading approaches. Access to, or delivery of a copy of, the Options Disclosure Document must accompany this worksheet. Buying an index straddle combines the benefits of both an index call and an index put purchase.
Leveraged potential profits can be substantial with a large move in the underlying index either up or down from a certain level. On the other hand, straddle buyers might instead be focused on short-term increases in call and put implied volatility levels without a significant move in the underlying index, and taking smaller profits when this might occur.
With either motivation, the amount of capital at risk can be predetermined, index is entirely limited. Buying an index straddle involves the purchase of both an index call and an index put on the same underlying index, with both options having the same strike price and expiration month.
A long straddle strategy is trading purchased and sold as a package, i. In a sense, as long as both call and put are trading an investor is hedged, with the bullish strategy potentially increasing in value with a rise in the underlying index, and the bearish put increasing with a decrease in the index level.
But as with any long index call or put, the holder of these options can always exercise them before the contracts expire. American-style index options may be exercised at any time before expiration, while European-style index options may be exercised only within a specific period of time, generally on the last business day before expiration. However, any long index option may be sold in the marketplace on or before its last trading day if it has market value. All index options are cash-settled.
For contract specifications for various index option classes, please visit the Index Options Product Specification area here. This is neither a bullish nor a bearish strategy, but instead a combination of the two. On the downside, the profit potential of the long put at expiration is substantial, limited only by the underlying index decreasing to no less than zero. Again, profit potential for the long straddle depends on trading magnitude of change in the index, not the direction in which it might move.
The maximum loss for the long straddle is limited to the total call and put premium paid. This will occur at expiration if the index closes exactly at the strike price, and both the call and the put expire exactly at-the-money and with no value. There are two break-even points at expiration for this strategy.
The downside break-even is an index level equal to the strike price less the call and put premium paid. An increase in volatility has a positive financial effect on the long straddle strategy while decreasing volatility has a negative effect - more so than with either a simple long call or put because two long options are owned.
Time decay has a negative effect on both long options as well. TradeStation Voted Best for Options Traders 2 Years in a Row by Barron's. Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options ODD. Copies of the ODD are available from your broker or from The Options Clearing Corporation, One North Wacker Drive, SuiteChicago, Illinois The information on this website is provided solely for general education and information purposes and therefore should not be considered complete, precise, or current.
Many of the matters discussed are subject to detailed rules, regulations, and statutory provisions which should be referred to for additional detail and are subject strategy changes that may not be reflected in the website information. No statement within the website should be construed as a recommendation to buy or sell a security or to provide investment advice.
The inclusion of non-CBOE advertisements on the website should not be construed as an endorsement or an indication of the value of any product, index, or website. The Terms and Conditions govern use of this website and use of this website will be deemed acceptance of those Terms and Conditions.
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