How you sit on a pony.
Also, a strategy in options trading.
Calls are options that make money when the price of the underlying asset goes up. Puts become profitable as the price of the asset declines. But there's a third direction the price can go: sideways. It may seem boring to bet on a stock holding to a tight range...a bit like betting on a snail race. But the short straddle is designed to take advantage of just that sort of move.
A short straddle is made by writing (selling) both a call and a put for the same underlying asset. Both contracts have the same strike price and expiration. The bet pays off if the asset's price sticks to a narrow trading range.
The investor receives premiums for selling the options contracts, which represent the profit from the transaction. The investor hopes that both contracts expire without being exercised. Then they get to pocket the premiums they received and move on with their lives.
However, short straddle strategy is risky. While it comes with a limited upside (just the premiums received), the downside is fundamentally unlimited. A big move in the price of the underlying asset, and the investor could lose large sums of money.
Related or Semi-related Video
Finance: What is a Derivative?23 Views
finance a la shmoop what is a derivative? well it's derived it's a something taken
from something else like a derivative of hot weather is thirst a derivative of [Girl takes sip of glass of water on a beach]
hunger is well you know crankiness that's diva thing you get there...
derivative of a 1/32 quarterback rating in the NFL is like serious wealth yeah
yeah discount double shmoop yeah look for it be on there with aaron
and a derivative of a stock or bond or other security is a something which
derives its value based on the performance of that underlying security
there are basically two flavors of derivative put options ie the right to [Ice cream flavors appear]
sell a security at a given price over a given time period and a call option, ie
right to buy a security at a given price over a given time period
well the price of that option is derived from the price of the security and a few
other factors like strike prices and duration and all that stuff
colonel electric the downgraded new version of General Electric is trading [Colonel Electric appears in a suit]
for 25 bucks a share a derivative of its share price is sold in the form of a
call option with a $30 strike price expiring about 90 days from now on the
third Friday of the end of that month well investors pay a price albeit
probably a small one for the right to then pay 30 bucks a share for colonel [Call option appears for colonel electric]
electric at any time in the next 90 ish days until that option expires making the bet
that the stock will go well above 30 bucks a share in that time period that
call option is thus a derivative of the colonel electric primary stock price got
it if you really want to get personal well here's the ultimate form of
derivative [Baby laying down]
Up Next
What is a put option? A put option is a type of contract that lets the investor sell shares of a stock at a certain price and within a window of ti...
What is a call option? A call option is a type of contract that lets the investor buy shares of a stock at a certain price and within a window of t...