Letters To S&C by Technical Analysis, Inc.
OPTIONS: THE MISSING LINK
In the May 2008 STOCKS
& COMMODITIES article
“Options: The Missing
Link,” author Martha
Stokes makes some good points about the dangers of option trading
and the necessity of understanding
the basics of stock trading. But the article
also contains some statements that
are likely to confuse people who are not
well-versed in option strategies.
For example, in the last paragraph of
the section “Smaller capital base = more
risks,” Stokes states, “If the stock moves
up then the sell option expires worthless,
but the buy option makes money
and vice versa.” However, in a straddle,
the trader is either a) buying a call and
buying a put, or b) selling a call and
selling a put. There is no such thing as a
“buy option” and “sell option” within
the same straddle. You’re either buying
both options or selling both options.