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RHAT Daily Chart – Short Straddle Example #2

Filed Under Trading Articles 

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Source: Quote.com®

 

NOTES ON RED HAT INC. (RHAT)
Short Straddle

1. After running up from the 6-8 dollar range, RHAT put in a high of about $28 before breaking down to a lower trading range in the $15 area.

2. Once falling into the new trading range in early July RHAT starts to develop a new range around $15. The range starts out relatively wide but appears to tighten as time goes on. This consolidation is an ideal time to sell a strangle.

3. The short strangle involves the simultaneous selling of an out-of-the-money call and an out-of-the-money put. For this, you will have a position that collects money as time passes. The short call and short put will provide break-even prices above the call strike and below the put strike. If the stock stays between these two break-evens between now and expiration, you will collect the value of your short strangle.

4. As the stock continues to consolidate and the range tightens, there is a chance that a short straddle will be better in the future the stock’s range tightens.

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