Non Directional Option Strategies – Trading Tips | Free Stock Tips …

ByManny Backus applied, applied-materials, king, materials, option-trading, optionsxpress, sharebar-option, straddle Comments Off

Sharebar

Option trading strategies can be used for all types of stock market conditions. One of my favorite and most successful ways to use stock options is via non directional strategies.

Non directional strategies can profit no matter what way the stock moves!

While this may seem too good to be true, there are caveats to it. The stock needs to make a substantial move in one direction or the other to create profits. If the stock doesn’t move or barely moves, these strategies will lose money.

One of the best times to use a non directional strategy is right before a market moving or stock moving even takes place. For example, in the stock market, earnings releases often move stocks sharply in one direction or another. This is particularly true in already volatile names. You can learn what’s working now in the option market by reading Wealthpire’s Option Trading Weekly premium advisory.

Here’s an example from a trade in 2013.

Applied Materials announces fourth quarter and fiscal year earnings on November 13 after the stock market closes at 4:30PM. This is the Price Driver on which I am basing the straddle strategy.

Applied Material’s share price has been in a tight channel between $17 and $18 since September 24. Traditional technical analysis would expect the gap up that occurred on September 23, to eventually be filled by a downside drop. This has not occurred yet, nor is it a guarantee of it ever occurring.

Either an upside surprise or bearish numbers from Applied Materials on November 13 will make for a profitable straddle trade.

Either an upside surprise or bearish numbers from Applied Materials on November 13 will make for a profitable straddle trade.

Here’s What To Do:

The position is purchasing an AMAT November 2013 18/18 Option Straddle.

Step One:

Buy to open AMAT Nov 2013 call at an $18 strike price-current bid 0.25, ask 0.27

Step Two

Buy to open AMAT Nov 2013 put at an $18 strike price—current bid0.35, current ask 0.37

Some specialized option trading platforms allow the entry of various strategies with only one trade. With others, you need to enter each side of the trade separately. Each side of the option trading strategy is called a leg.

This straddle has a total cost of $0.64 and $17.36 stock price is the breakeven level of the trade

As you can see from this graph courtesy of OptionsXpress, the straddle starts to profit when AMAT’s stock price hits $17 or $18.83. It’s critical to note that if the share price ends up between $18.64 and $17.36, the straddle will be a 100% loss. This means that the entire $64 straddle cost will be gone. This seems like a small price to pay for potential 600% plus returns in a very short time frame.