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.