When a stock is expected to move dramatically and we also do not know which direction the stock will go, then we can use option straddle/strangle strategy. The is the case on some Bio tech company. For example, DNDN, we don't know the future of the company very clear. If the company can get their medicine approved quickly, their stock will rock. But they can't get their drug approved quickly and short of cash or failed on their drug, their stock will go to zero.
So if I buy straddle/strangle, if the price move, we profit. If the price stays constant, we lose premium.
Then when to buy straddle/strangle? The less the premium, the better. So if the price option is at $5 and $7.5, and the stock price at $5/$7.5, it is the best place to buy the $5/$7.5 call/put. If the stock price is in somewhat middle, say $6.25, it is the best place to buy straggle, that is buy $7.5 call and $5 put.
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