The beauty of options trading is that you can have a position on volatility without caring about the direction.
Apple Inc. (AAPL) has a price range that has been compressing for the past few months and is nearing the apex of a triangle. When volatility compression persists for this long, expecting volatility expansion is a reasonable bet.
The problem is, which way? It will probably be up because the longer term trend is up, but given the way the overall market has been trading it could be ready for a stop-run under 95.
A long straddle is an option strategy that is a combination of a call buy and a put buy. It makes money if the stock sees a strong move in either direction, but it doesn’t matter which way it moves. It can also make money if the option premium rises, which will happen if the implied volatility (IV) of the stock rises.
Because a straddle costs more than a directional option buy, more of a move is required for it to make money.
Buying the AAPL Oct4 100 straddle for 5.50 or lower is a good bet. This position requires AAPL to see at least $5 worth of movement in either direction by open to be profitable.
There is an added benefit here– be warned, this is a bit advanced.
Because AAPL has earnings on Oct 20 and these options expire on Oct 24, much of the earnings-related risk will become priced into these options.
This means that the implied volatility has the potential to rise further as we head into earnings, and it will help to hedge against any potential time decay in the position.
Profit target is 20% return on risk.
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Learn more about Steven Place’s work: Investing With Options
