You’ve certainly heard the phrase ‘straddling the fence,’ and it can be mentioned in reference to many different things. For example: He’s straddling the fence on his vote during election time, not sure whether to vote Democrat or Republican. You get the idea, and now it’s time to apply that definition, example and line of thinking to the stock market. There is an option play called ‘straddle option,’ and in essence, what you’ll be doing when you make this play is straddling the fence, hence the name.
It’s one thing to buy stock or to make an options play based on a stock price going up or down. It’s a completely different story when you have a straddle option, meaning you decide the stock is going to do something alright, you’re just not sure what. Sometimes it’s hard to decide, yet you still want to make a play. If this is the predicament you find yourself in, then you make a straddle option play, Now, simply put, this play seems to not be risky at all, right?
The fact is this options play is actually risky and for one reason. You’re banking on not only that the stock will move but that the price will change significantly. If this doesn’t occur, and the specifics will be in your contract, then you’re going to lose money. That’s how this type of options contract works, so it’s usually going to be a move for investors when they see big news about a company but don’t know how the public will react.
It’s also one of those Vegas style options contract moves if you ask me. It may not be the best move for a beginner, but it sure does have a distinct method to its madness. I would rather know that I made money if a stock went up, but I am interested in options trading all the same.
If you think the stock market itself is difficult to navigate, just try and dip your toes into options trading. I used to ignore options contracts until one day I felt there was an opportunity with a stock I had been following for years. I had already made some money off of the stock price increase over time, and I was starting to understand options a little better. The only problem was that my brokerage account wasn’t set up to do options contracts.
The brokerage did offer the opportunity to trade options, but you had to apply. For options, you just had to tell them that you were comfortable and had enough experience trading to want to try options. They classified your options trading account by assigning you a level, and then of course many people who trade options also get into margin trading.
What do you know about options contracts? When I was looking at them, I was wanting to open a contract that would make me money if the price of the stock I was following continued to go up. If I had looked into options for this individual security sooner, I might have had better plays possible. However, people were pretty much thinking the same way I was thinking because the stock had been on the rise for quite some time.
So, in order to make any real money on an options contract with this security, I would have had to take a position that said the stock price was going to be much higher than the forecast. Either that, or I would have had to hedge against the stock price, saying it was going to be much lower, and I would have been wrong on both accounts. You have to really know what you’re doing when you’re trading options.