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When it comes to trading, one of the most important lessons I've ever taught is that there is always an appropriate response to every market or stock movement. It's possible that you're unaware of it, but there is one. This is typically accurate because if you wait too long, there are some circumstances you can't get out of, but in most cases, there is a means to react to and survive just about everything. If you wait too long, there are some situations you can't get out of. IF YOU ARE AWARE OF WHAT NEEDS TO BE DONE AND HOW IT SHOULD BE DONE. The primary focus here is to draw attention to the fact that just having knowledge is not sufficient. You need the knowledge, and getting it requires training. Having said that, it does begin with being aware of what.


The Balloon Strangle is a strategy that I devised as a means of mitigating the consequences of excessive volatility and unpredictability (also known as danger) caused by market announcements that take place while the market is closed. This would be comparable to profits announced after business hours, an expected board meeting, or a legal decision. Something that has the potential to significantly move the stock, but you do not know in which direction it will go. It is common knowledge (and sound counsel) to steer clear of situations like these at all costs.


The strangle or straddle play is a common technique that may be used to reduce the negative impacts of volatility. The traditional starting point for strangles and straddles is either at the money or very close to it. You do this by taking opposing viewpoints, which puts you in a position to win regardless of the outcome. You are holding out hope that the move will be significant enough to bring the losing position to zero, allowing the winning position to generate a profit. Problem... positions near the money are costly, and the move must be rather substantial in order to eliminate one position while still moving far enough to earn money on the other one. However, the concept behind this is that you will be protected from the unknown to some extent. If one increases in value while the other decreases, at least you can maintain your current level of financial stability.


A twist that made use of the leverage offered by Out of the Money situations was known as the balloon strangle. When displaying the option prices via the use of a graphic, you will often notice a leverage point in the curve that is produced as a result of charting the option prices. It happens in positions that are not currently in the money. It denotes a point in time at which the value of the option shifts much more rapidly in one direction than in the other. In other words, if the stock goes in one direction, the value of the option changes extremely quickly, but if the stock travels in the other direction, the value of the option changes very slowly.


Here is an example of a balloon strangle on an earnings bet using YHOO as the underlying security. I decided to play this due to the possibility that YHOO may move in such a way that would result in the payout of the cost of both an out-of-the-money call and a put option. There was a possibility that my money may be increased by 100%.


At this point, YHOO's price is almost halfway between two critical price levels. This is an ideal situation for this drama to take place in. The YHOO profits have a tendency to make a significant shift, and it has well-defined goals.


What really took place is as follows. YHOO behaves as if it were following a predetermined script. The upward advance immediately encounters the barrier.


Now for the outcomes... YHOO approached the point of resistance and then hesitatingly stopped. I waited two hours into the trading day before I made my decision to get out of the deal at the first indication of uncertainty. Resistance seemed to be holding, and I got what I was hoping for in an upward move, so I liquidated both positions when it appeared that it would continue to do so. The actual net, which came to $1.75, was not far off from the projection of $1.70.


By the way, as the day progressed and YHOO did not make any effort to climb higher, the value of the Oct 42.50 started to decrease at a rate that was much quicker than the stock's decline. As a result, the price of the 42.50 calls fell below.50, while the stock moved down by.60. If I had waited until the end of the day, it would have cost me more than fifty cents. The play was simply going to be performed in order to observe the audience's response to the news.


This tactic requires experience and may be used to movements that are possibly of a decent magnitude. Always have some experience under your belt before looking for money.