Explore Your Options  |  MAY 2007

Explore Your Options by Tom Gentile

Stocks & Commodities V. 25:5 (61): Explore Your Options by Tom Gentile Got a question about options? Tom Gentile is the chief options strategist at Optionetics (www.optionetics.com), an education and publishing firm dedicated to teaching investors how to minimize their risk while maximizing profits using options. To submit a question, post it to our website at http://Message-Boards.Traders.com. Answers will be posted there, and selected questions will appear in a future issue of S&C. STRADDLES AND STRANGLES I’ve been looking at some straddles and strangles on stocks that I think will see an increase in volatility over the next month or two. But I’m not sure if I should use a straddle or a strangle. Also, how big of a move does the stock need to make before I make money on the puts or the calls? Straddles and strangles work great in volatile markets and can also offer a good way to partially hedge a stock portfolio. Both trades consist of purchases of puts and calls on the same underlying stock with the same expiration months. The straddle uses options with the same strike price. The options are both at the money, which means the strike price is equal to (or very close to) the stock price. The strangle, on the other hand, uses out of the money options, which means that the strike price of the call is higher than the stock price and the strike price of the put is lower than the stock price.

by Tom Gentile