Straddle and strangle trading strategies are two popular options trading strategies used by traders in the UK. These strategies require the purchase of both a call option and a put option that have the same price, but the expiration dates must be different. This approach allows traders to take advantage of market volatility while limiting their risk exposure to any direction.
Profit from market volatility
One advantage of using a straddle strategy is that it allows you to make good use of market volatility regardless of whether prices move up or down. For example, let’s say that you buy 100 shares of a stock for $100 each and sell one call option expiring in 6 months at $110 per share and one put option expiring in 6 months at $90 per share.
If the stock moves to $120 and then down to $80 by the expiration date, your call and put options will increase in value. This increase in value means that you stand to do well regardless of whether prices move higher or lower.
Limit your risk
Another advantage of using a straddle strategy is that it helps limit your downside risk. Even if the underlying stock price falls dramatically, only your put option will lose its entire value, while your call option may still be worth something when it expires.
In contrast, if you bought shares outright instead of using a straddle strategy, you could lose all of your investment if prices fall below the strike price of $100 per share.
What are the drawbacks of using these strategies?
There are some drawbacks associated with using a straddle strategy in UK markets. For one, costs can add up quickly when purchasing a call and a put option on the exact same underlying asset.
Additionally, these strategies rely heavily on market volatility to do well, so they may not be ideal if prices stay stagnant or move within a narrow range for an extended period.
Why novice traders should use a reputable online broker before attempting these strategies
Novice traders should use a reputable online broker before attempting these strategies because they offer a wide range of trading resources that can help you learn about options trading and how these strategies work.
Online brokers such as Saxo Markets also offer a wide range of trading resources that can help you learn about options trading and how these strategies work. For example, many online brokers have tutorials on their websites explaining the basics of options trading and detailed information on specific types of options trades, such as straddles and strangles.
Additionally, most online brokers have experienced customer service representatives who can help answer any questions about using these strategies. If you are still determining whether a particular strategy is right for you, customer service representatives can provide guidance based on your financial situation and investment goals.
Other strategies used by UK traders
There are many other options trading strategies used by traders in the UK, including spreads, butterflies, and iron condors. These strategies involve buying multiple options contracts with varying expiration dates and strike prices to profit from price movements in a particular direction.
Technical and fundamental analysis are also widely used by traders in the UK when making decisions about which options trades to place. Technical analysis relies on charts and other tools to identify patterns in market price movements. In contrast, fundamental analysis involves analysing a company’s financial information and market-level data to predict future price movements.
Whether you prefer technical or fundamental analysis or are looking for a simple strategy that you can use regardless of market conditions, there is likely an option that will work for you. You can use these strategies confidently with the proper guidance from a reputable online broker.
The final word
If you’re interested in learning more about straddle and strangle strategies in UK markets, many online resources can help you set up your trades. By understanding how these strategies work and researching current market conditions, you’ll be able to make well-informed trading decisions that could potentially lead you to find good trading opportunities.