Profit: increases as the stock rises or falls. At expiration, break-even points will be the strike +/- prices paid for options. For each point above upside break-even or below downside break-even, profit increases by an additional point.
Loss: limited to the amount paid for options.
Risk: limited.
Reward: unlimited.
Margin: not required.
Time decay: This position is a wasting asset. As time passes, the value of position erodes towards the expiration value. If volatility increases, decay slows. If volatility decreases, decay speeds up.
Research Findings and Trading Tips:
1. This strategy makes you bet on an increase in the stock’s volatility. It is reasonable to count on such development if the volatility is currently low, or, in other words, the stock price has been stable for a while and is expected to move in either direction. We strongly recommend that you analyze the volatility chart if you decide to go with this strategy.
2. Lower and higher break-even points must be compared with the support and resistance levels on the stock chart. Such comparison will allow you to estimate the real chances of yielding profit.
