You don't know which way, only that it will be big. This lesson prices that bet, and shows why "big" has to beat what the market already expects.
After this lesson you can
- Work out a straddle's cost, worst case and both breakevens
- Compare the price of a straddle with the move the market already expects
- Explain how time decay, and a drop in implied volatility after earnings, can sink a correct forecast
- Choose between a straddle and a strangle, and set a time limit before you enter
- Avoid the five mistakes, starting with mistaking "it will move" for "it will move enough"
Chapters
- 0:00A bet on a big move
- 1:42One call, one put
- 2:55What it pays at expiration
- 4:19How big a move?
- 5:41Time works against you
- 6:55The volatility bet
- 8:32The strangle: cheaper, wider
- 9:59Managing a straddle
- 11:21Five mistakes
- 12:30The whole lesson on one screen
Practice in the game: Level 5 · Seismograph