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Chapter 5. Advanced option strategies > Straddles and strangles

Straddles and strangles

Straddles and strangles are option spreads that involve both puts and calls. The straddle involves buying or selling puts and calls at the same strike price. During the life of a straddle, it is almost a certainty that one or both of the options will be in the money at any point in time. The strangle involves different strike prices, so it is less likely that both, or even one of the strangle legs, will be in the money at any point in time. However, it is certainly quite possible. There are two sides to each of these market plays, so let's examine the four possibilities.

Buying a straddle

It is late September, and the December T-Bonds are trading at 10503. You buy the December 105 call and the 105 put. The call is trading for two full points and 1/32. The put is trading for 1 and 31/32. Your cost is the sum of both premiums, or in this case, four full points or $4,000 (plus commissions). So that you can be profitable at expiration, bonds must move more than four points, above 109 or below 101.



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