InvestorQ : What can I do in derivatives if I am not clear about the direction of the market?
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manisha Kolvenkar made post

What can I do in derivatives if I am not clear about the direction of the market?

Answer
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Aashna Tripathi answered.
2 years ago


Don’t worry about direction because you can still use Volatile Straddles and Strangles. A straddle is bought when you are confident that the stock is going to be extremely volatile but you are not sure of the direction of the volatility. Infosys on the day of its results is a classic example. In that case you can buy a call option and put option on the same strike and create a long straddle. The total cost of the straddle strategy will be the sum of the call premium and put premium. If the breakeven is breached in either direction, then your profits can be unlimited. The only problem in the straddle is the cost as you need to cover your call and put premiums. A solution is to go for strangle wherein you combine a higher call and a lower put to reduce your overall premium cost. When you expect a stock to be volatile you can buy strangle or a straddle and when you expect a stock to be range bound you can sell strangle or straddle.