The Straddle trade – setup and rationale

Options Trading Strategies

 

The Straddle trade is very popular  – Options players love it for the fact that you can make money whether the stock goes up or down. As long as it makes a big move in either direction, the Straddle makes money. What many won’t tell you are the pitfalls in the Straddle trade. The video below discusses a Straddle trade on Priceline (PCLN) on the Dec series with about 31 days to expiry.

 

The key features of a Straddle trade are –

 

– You’re Long both a Call and a Put Option, and this is generally put At the Money

– Both Long Options have a Delta of approximately 0.5 (because they are At the Money)

– The position itself is a Delta neutral position to begin with (+ve Call delta neutralizes -ve Put delta)

– Since you’re Long both a Call and a Put, your position is Theta negative (twice over)

– Since you’re Long both a Call and a Put, your position is Vega positive (twice over)

– You can reduce loss from Theta by going into further months, but you will face higher Vega exposure

– You will also have a wider breakeven range because you pay more for further out Options

– Your max loss (debit on the trade) is the what you pay for the Call + what you pay for the Put

– You are guaranteed a profit if the stock moves more than the debit on the trade in either direction

 

Ok, so that’s the basics. This video explains this setup in detail.

 

 

 

 

 

On the face of it, the Straddle seems like a gift from God. This is exactly what you’ve been looking for right ? As long as the stock makes a big move, you win. You don’t care which direction it moves but it needs to make a big move. Okay so many stocks make big moves these days, and so do the indices. But before you get all excited and go put Straddle trades, consider the following –

 

– How do you determine which expiry series you choose ?

– And what are your Implied Volatility considerations ?

– And how about avoiding the Valley of Death ?

 

These are Straddle characteristics that can kill your trade. Check out these detailed courses for much more on Straddle trades, where we completely break down the anatomy of a Straddle trade, its rationale, the specific situations where it makes sense to put a Straddle, and how to manage the trade from that point onwards.

 

Basics of Straddles and Strangles

 

Advanced Straddle Trades

 

Earnings Explosion Trade 

35 Comments

  • Jordan

    Reply Reply November 20, 2012

    I’d like to be an affiliate for your products if you have a program

  • gw2 gold

    Reply Reply November 21, 2012

    I trade the GLD gold etf

    • Hari Swaminathan

      Reply Reply November 25, 2012

      see your next question below

  • gw2 gold

    Reply Reply November 21, 2012

    Is Gold a good trade for straddles ?

    • Hari Swaminathan

      Reply Reply November 25, 2012

      Gold can be a good candidate at times. Generally these times will have to do with some sort of Federal reserve announcements about Quantitative easing, or some announcements by the ECB in Europe. Its important to know which country is making the announcement because Gold will generally appreciate or depreciate against that currency more so than others. For example, if QE is being announced in the US, Gold is likely to increase in value against the US Dollar more so than the Euro. Straddles can be profitable at these times. This course has good coverage of Gold. http://www.optiontiger.com/courses/intro-to-financial-markets/

  • moncler

    Reply Reply November 22, 2012

    Which strategies are good for beginner in options

    • Hari Swaminathan

      Reply Reply November 25, 2012

      Moncler, you should understand the theory of Options first. This is covered in Module II. – http://www.optiontiger.com/courses/ And then follow from there onwards to Modules 3, 4 etc..

  • Sanjeev

    Reply Reply November 22, 2012

    I trade straddles during earnings reports. What is the ideal time to put it on so that we don’t loose too much time decay ?

    • Hari Swaminathan

      Reply Reply November 25, 2012

      This is the tricky part Sanjeev. I say maybe 15 to 20 days, but again it depends on the stock, and when Volatility increase is likely to happen. Its different for each stock and also different during each earnings cycle. I’d urge you to check out this course which is basically a Straddle trade on Priceline just before earnings. This trade is an absolute beauty !! http://www.optiontiger.com/courses/priceline-earnings-explosion/

  • Alex

    Reply Reply November 22, 2012

    Hari, I bought the advanced module with the straddle course. Great stuff, and my question is when do you decide to go with a straddle or a strangle ? I get both the strategies and how they work but is one better than the other for certain situations. You can reply privately to me if you like.

    • Hari Swaminathan

      Reply Reply November 25, 2012

      Alex it depends upon how much debit you want to spend, how convinced are you of a strong move and also how much time you have for the strategy to play out. Strangles are cheaper but the stock needs to make a bigger move. Generally you need a bit more time as well for this reason.

  • Prakash

    Reply Reply November 22, 2012

    In India we can’t execute spreads like straddles. Do you know why ?

    • Hari Swaminathan

      Reply Reply November 25, 2012

      Yes i know Prakash although i believe its starting to change. You can now put in multiple orders which will either all execute or none. This is probably the best option for traders in India.

  • Jon

    Reply Reply November 22, 2012

    Best wishes!Your blog is very good!

    • Hari Swaminathan

      Reply Reply November 25, 2012

      Thank you Jon 🙂

  • goose

    Reply Reply November 22, 2012

    wonderful post, thank you. Our platforms in canada are not so advanced

    • Hari Swaminathan

      Reply Reply November 25, 2012

      I believe Canadians can open accounts in the US without too much bureaucracy.

  • Straddler

    Reply Reply November 22, 2012

    What adjustments are good for a straddle

    • Hari Swaminathan

      Reply Reply November 25, 2012

      In general you don’t need to adjust straddles unless you’re an advanced trader. You can try to leg out of one side of the straddle and capture some value in the Option. You can also try to sell an Option that is a bit more Out of the money. But the best things to do with a Straddle is close the trade out. I’ve tried to show some of these adjustments in the Advanced straddle course – http://www.optiontiger.com/courses/advanced-straddle/

  • Volexpert

    Reply Reply November 22, 2012

    Just don’t come too close to expiry, you lose too much on time decay.

    • Hari Swaminathan

      Reply Reply November 25, 2012

      Absolutely…unless you’re playing the earnings trade

  • herman

    Reply Reply November 22, 2012

    Is there a pre-requisite for the straddle course ? I’ve heard this is a good strategy but want to be sure i don’t need anything else

    • Hari Swaminathan

      Reply Reply November 25, 2012

      Herman, you should really understand how Options work completely before trying any strategy. Not sure how much you know, but if you want to drop a note, I can suggest something.

  • trader canada

    Reply Reply November 22, 2012

    which options series will you choose ? how much time decay is good ?

    • Hari Swaminathan

      Reply Reply November 25, 2012

      I’d say 1 to 2 months out at least. You have a battle between Vega and Theta. By going out in time, you’re reducing Theta losses for your Long options. But you’re also increasing exposure to Vega – remember Options further out in time have more exposure to Vega. And a straddles is a Vega positive position, so you need Volatility to increase after you put the trade. Check this course – http://www.optiontiger.com/courses/implied-volatility/

  • Sam Chesser

    Reply Reply November 22, 2012

    Didn’t I mention this straddle strategy I have been using?

    • Hari Swaminathan

      Reply Reply November 25, 2012

      Sam, I sent you a mail earlier on your hedge fund matter. Did you get that ? Would be happy to chat live – it sounds interesting..

  • Lucy

    Reply Reply December 4, 2012

    Any particular stocks better than others for a straddle ?

    • Hari Swaminathan

      Reply Reply December 6, 2012

      Stocks that move a lot Lucy. Priceline, Apple and Google are great candidates – but just make sure you don’t pay too much for Volatility. This will bust the straddle

  • Alex

    Reply Reply December 4, 2012

    Hari you have 2 courses on straddles and what about strangles. Do you cover strangle strategies

    • Hari Swaminathan

      Reply Reply December 6, 2012

      Alex, you bought the straddles course. Strangles are covered too (unless this is a different Alex) ..Just send a mail to info at optiontiger dot com

  • Sri

    Reply Reply December 5, 2012

    We need volatility for a straddle and the downside is time decay. Is the SPY or other index Etfs good for the straddle – I trade FAS a lot as i like the movement and it seems like it would work well. FAs is a 3x (triple) leveraged ETF

    • Hari Swaminathan

      Reply Reply December 6, 2012

      I know it moves a lot. WHich is good for a straddle – what i don’t like are the high Implied Volatilities – I don’t know FAS well enough to judge how this may impact a straddle

  • Hari Swaminathan

    Reply Reply December 6, 2012

    FAS is good Sri..I’m not a huge fan of these triple leveraged ETFs, they’re somewhat unpredictable. For a short term trading outlook they may work well i suppose.

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