Profit: unlimited. It increases as the stock rises above a higher strike or falls below a lower strike. At expiration, break-even points will be:
· lower strike - premiums paid for options,
· higher strike + prices paid for options.
For each point above the upside break-even or below the downside break-even, profit increases by an additional point.
Loss: limited to the amount paid for the options. Maximum loss is realized if the stock ends between the strikes. For each point above a higher strike or below a lower strike, loss decreases by an additional point.
Risk: limited.
Reward: unlimited.
Margin: not required.
Time decay: This position is a wasting asset. As time passes, 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 requires less initial investment than the straddle, but you should anticipate much more substantial stock movement in either direction.
2. You need to compare stock volatility with its average levels and the entire market volatility trends.
