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Take a look at some popular option strategies below:
Straddle
This strategy requires volatility to rise, in order to close the position at a profit. A Long Straddle can be achieved if you buy an at the money Call and Put, let’s say with a strike price of 1.3900. With this strategy someone can profit if the market price moves in either direction. The maximum potential loss is the premium paid whereas the maximum potential profit is unlimited. The lower breakeven point is the strike price minus the premium paid and the upper breakeven point is the strike price plus the premium paid.
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This strategy works well when you expect the exchange rate to move but are not sure on the direction. It could work well in major news releases in turbulent times when the market finds it hard to estimate figures such as unemployment and price levels, as positive or negative results can swing the underlying pair either side.
Bear Call Spread
This strategy anticipates that the market price will go down in the short term. A Bear Call Spread strategy can be constructed if you buy an ‘out of the money’ Call, and sell an ‘in the money’ Call. The maximum potential profit is limited to the premium received, while the maximum potential loss is limited to the strike price of the long call minus the strike price of the short call minus the premium received. The breakeven point is the strike price of the short call plus the premium received.
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A Bear Call spread can be used by investors looking to earn a premium if the price remains stable or moves in their favour while keeping their potential losses limited. However, it is not an optimal strategy if you expect the exchange rate to move significantly in your favour, as you will be giving up potential gains.
Bull Put Spread
This strategy anticipates that the market price will rise in the short term. A Bull Put Spread strategy can be constructed by buying an ‘out of the money’ Put and selling an ‘in the money’ Put.
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The Bull Put spread is a mirror image of the Bear Call Spread. It is used by traders wishing to earn premium whilst controlling downside risk.
We hope you now have a fair understanding that option strategies can help a trader in hedging and speculating on the market depending on his views and expectations.
Straddle
This strategy requires volatility to rise, in order to close the position at a profit. A Long Straddle can be achieved if you buy an at the money Call and Put, let’s say with a strike price of 1.3900. With this strategy someone can profit if the market price moves in either direction. The maximum potential loss is the premium paid whereas the maximum potential profit is unlimited. The lower breakeven point is the strike price minus the premium paid and the upper breakeven point is the strike price plus the premium paid.
[You must be registered and logged in to see this image.]
This strategy works well when you expect the exchange rate to move but are not sure on the direction. It could work well in major news releases in turbulent times when the market finds it hard to estimate figures such as unemployment and price levels, as positive or negative results can swing the underlying pair either side.
Bear Call Spread
This strategy anticipates that the market price will go down in the short term. A Bear Call Spread strategy can be constructed if you buy an ‘out of the money’ Call, and sell an ‘in the money’ Call. The maximum potential profit is limited to the premium received, while the maximum potential loss is limited to the strike price of the long call minus the strike price of the short call minus the premium received. The breakeven point is the strike price of the short call plus the premium received.
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A Bear Call spread can be used by investors looking to earn a premium if the price remains stable or moves in their favour while keeping their potential losses limited. However, it is not an optimal strategy if you expect the exchange rate to move significantly in your favour, as you will be giving up potential gains.
Bull Put Spread
This strategy anticipates that the market price will rise in the short term. A Bull Put Spread strategy can be constructed by buying an ‘out of the money’ Put and selling an ‘in the money’ Put.
[You must be registered and logged in to see this image.]
The Bull Put spread is a mirror image of the Bear Call Spread. It is used by traders wishing to earn premium whilst controlling downside risk.
We hope you now have a fair understanding that option strategies can help a trader in hedging and speculating on the market depending on his views and expectations.
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