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The option owner can exercise it before expiration (for American style option, like here), or only on the expiration date(for European style option).
Technically, you can exercise or not your option (it's a right). You can also forget to exercise it (I never tried ).
Mike,in the past you may have had a discount coupon (option contract) for a pizza from your local restaurant. The owner had written the option for you to buy at a discount, it had an expiry date and was worthless if you did not exercise your right to the discount pizza. The owner who wrote the option was at risk if the price of cheese escalated but made a big profit if cheese fell in price, also if you presented the coupon (exercised) to him then he was bound to honor it............or at least that is how was explained to me. Sorry Sam if I butted in.
I've been a bit lazy these last days, but an example of a long straddle, after the short straddle on CL of last month.
Here the underlying is Google, and my idea was: "their are going to talk about their new phone, it's going to move in the next few days. Up or down, I don't know...".
So the strategy was buying a Call and a Put, strike $630 for both (a Straddle), Jan 10 expiry. As the expiration date was quite close (10 business days), the straddle will not be held more that 4 days, I should have sold it on dec 8.
As GOOG quotes 626 when I bought the Straddle, the lower B/E was 610.7, the upper B/E 649.3, a bit risky trade.
I didn't had to wait too long, GOOG had a nice move down on jan 6, so the position was closed for a $530 profit.
Having waiting one more day would have been a good idea, as on dec 08 the straddle value was $32.40 (so $1370 profit, much better...), but it was better to exit quickly...
I'll keep an eye to this straddle until it expires, just to see what happens.
Cory,
You can use thinkorswim, for example, for almost any multileg positions. You can see a straddle sample. It's a very good platform but not cheapest.
IB for me, maybe not the best interface, but good enough for me, and cheap commissions. Cheap commissions is most important than a super-sexy interface, imho.
This GOOG Straddle value is now $42.5, the profit could have been much higher in waiting 5 more business days ($2380).
Another simple strategy, a Bull Call Spread on NTAP (NetApp). I'm bullish on NTAP, was waiting for a small pullback to get in. But as I don't want naked stocks, a Bull Call Spread is maybe the good idea.
This spread is: buy 1 ITM Call/sell 1 OTM Call, so here, with NTAP @ $33.60
- buy 1 NTAP Call 32 Mar 2010: $2.95
- sell 1 NTAP Call 35 Mar 2010: $1.40
- (2.95-1.40) X 100= $155 per spread
- B/E is $33.55, we'll have a profit if NTAP quotes above $33.55 at expiration (or before)
Max loss is $157 per spread, max profit $151.
The max loss is the price payed for the spread, and the max profit is: (35-32-1.55) X 100 (-$2) (strike price of Short Call - strike price of Long Call - Net Premium Paid -commission).