This is based on the concept that if the value of an asset moves in one direction, it is unlikely to remain there and will soon move back towards its original position. An investor should therefore buy a Call option if the price has just fallen or a Put option if the price has just risen.
This involves buying both a Call and Put option on the same asset at its low and high points, in effect straddling the two extremes. It is best used in volatile markets. An expiry level in between the two strike prices is ideal, and means that the investor is doubly successful, but if this does not happen, then losses are minimal because one option expires in the money.
The Knock-on Effect
In our CEO’s opinion, this is the most logical of all strategies. The idea is that the price of a stock may affect the price of the index in which it is traded, or a related stock or commodity. The key here is to understand the connections between assets and anticipate knock-on movements.
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