John Jagerson

How to Profit if the Market Goes Up … or Down

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This article is brought to you by LearningMarkets.com.

Options investors have a unique ability to profit in the market no matter which direction it moves. A straddle is one way to do this. These trades are market neutral, have an extremely low probability of maximum loss and pay big returns when the market moves a lot.

In order for a straddle to be successful, the market needs to make a big move up or down. The "straddle" means that you are buying two options, a call and a put, with the same strike prices. Imagine that you are "straddling" both halves of a chain sheet. A straddle is most frequently entered with the at-the-money strike prices.

I will illustrate this strategy with the chain sheet below on the PowerShares QQQ Trust (QQQQ), which tracks the performance of the Nasdaq 100 (NDX).

At the time of this writing, QQQQ was priced at $49.61. I have highlighted the at-the-money strike price for both the calls (left) and puts (right). Expiration is six months away, and the call has an ask price of $4.08 while the put is priced at $4, for a total price of $8.08 ($808 dollars per straddle contract).

See full-size image.

This may sound a bit unusual to buy both a call and a put at the same time. Traders often assume that gains from one of the options will be offset by losses in the other. That is true to a point. However, if the underlying stock moves more than $8.08 away from its current price, either up or down, by expiration, the trade will be profitable.

Therefore, this is a trade you enter when you anticipate that there is a very high chance of big moves in the future.