Asset 7
Asset 7

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The underlying stock has been moving directionally for some time and is exhibiting signs that participation in the directional movement is exhausting.

When an underlying stock exhausts a move, it’s a great time to look at a high probability idea like an “Exhaustion Straddle”

Enter an Exhaustion Straddle (Sell 1 calls at one strike price while simultaneously selling single put at the same strike price). To construct this position:

  • Current Stock Price: $X/share
  • SELL TO OPEN 1 CALL OPTION near current price
  • SELL TO OPEN 1 PUT OPTION at the same price as the call
  • >> The resulting order contains 2 option contracts in total and is entered as a “credit” 

The max projected loss for this investment is based on what could happen at expiration.  It is an “unlimited” risk investment, which means we only look to enter an exhaustion straddle when we have high confidence that the underlying stock is going to consolidate in a price range for several weeks.

The underlying stock should consolidate in a range of prices over the next couple weeks causing the credit available to shrink and taking the investment into profit. An investor can close the trade for profit when the available credit is smaller than the credit collected when entering it.

The underlying stock should not have a daily close outside the “break-even” range.