Long straddle (I agree with Atticus, not the way to go) - but, for discussion purposes: If a stock is trading around $50, and the calls and puts are about the same price, say $2.00 (Near term ATM) each.
You pay $4.00 hoping that the stock will move up or down more than $4.00. Pretty simple, except that each day that goes by, those options lose value.
To help with the thought process. Take a $50 stock, with a historical vol of 30. $50 x 30= $15 each way over the period of a year, right? So, if you divide by the square root of that time frame ( 1year ) which is about 19. So each day makes the assumption that the stock shouldn't move more than 80 cents either way on any given day. And, consider half up half down, or consider 75% up and 25% down, whatever you wish, to see that in 30 days you will likely not move enough to make you money.
Now, in these days of really low Vol, you would be selling a 12 implied vol straddle, praying for a 40 vol move, or 2 to 3 standard deviations. Not a wise move.
Or, to keep it even more simple.
$15 each way based on high 30 vol divided by 12 equals about $1.25 each way.
You need to find options that are trading (Implied vol) much higher than historical, to even consider them. And, because the implied causes them to be more "expensive" (still within pennies on conversion of course).... either there is news or some other reason for their higher vol (merger news, dividend news, etc.). And, you don't know what the MM's know generally.
I try to keep these simple concepts out for you to read, and digest. Not trying to "show off" what I know or anything, just hoping that by keeping it simple, you'll decide whether options trading is for you.
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All that being said, options trading boils down to nothing more than trying to out-guess the other side of the trade about next expiry's volatility. Nothing more, nothing less. Simple option valuations.
All the best,
Don
We annoying you yet? I´m trying.