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The Straddle trade – setup and rationale

 

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 


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35 thoughts on “The Straddle trade – setup and rationale

    1. 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. https://www.optiontiger.com/courses/intro-to-financial-markets/

  1. 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 ?

  2. 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.

    1. 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.

    1. 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.

    1. 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 – https://www.optiontiger.com/courses/advanced-straddle/

    1. 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.

    1. 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 – https://www.optiontiger.com/courses/implied-volatility/

    1. 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..

    1. 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

    1. 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

  3. 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

    1. 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

  4. 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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