SteadyOptions is an options trading forum where you can find solutions from top options traders. TRY IT FREE!

We’ve all been there… researching options strategies and unable to find the answers we’re looking for. SteadyOptions has your solution.

Long straddle: a guaranteed win?


I came across the following question on Quora: "If an event happened that would sizably move a stock price (ex. poor earnings) from its original point, wouldn’t buying both a put/call option on that price be a guaranteed win? No matter which way the stock price moves, I would make a large return (even if I lost money on the other option)."

First of all, as a general comment, there is no such thing as guaranteed returns in the stock market. If there was, everyone who is trading the stock market would be a millionaire.

 

The proposed trade is called a straddle option

 

A straddle option strategy is vega positive, gamma positive and theta negative trade. That means that all other factors equal, the option straddle will lose money every day due to the time decay, and the loss will accelerate as we get closer to expiration. For the straddle to make money, one of the two things (or both) has to happen: 


1. The stock has to move (no matter which direction).
2. The IV (Implied Volatility) has to increase.  

 

In simple terms, Implied Volatility is the amount of stock price fluctuations. Being on the right side of implied volatility changes can enhance the chances of success. 

 

The problem with the proposed setup is that you are not the only one who knows about the event - it’s a public knowledge, so market participants bid the options prices in anticipation of the event, driving IV to higher than usual levels. After the event the IV usually collapses. If the stock moves more than “implied” by the straddle price, then the straddle will be a winner. BUT more often than not, the options prices overprice the potential move, and when the stock moves less than expected, collapsed IV will make the straddle a loser.

 

Example:

 

NFLX was scheduled to report earnings on October 15, 2015. The stock was trading around $110, and 110 straddle around 15.50. This price "implied" $15.50 move. The following image presents the P/L chart of the trade:

 

nflx before.PNG

As we can see, the IV is around 240% for those options, reflecting the upcoming event.

 

Fast forward 24 hours: the stock moved $9 which is a substantial move, but less than "implied" by the options prices. This is the P/L chart:

 

nflx after.PNG

 

As we can see, IV collapsed to ~85%, and the trade has lost 42%.

 

At SteadyOptions, we trade straddles in a different way. We usually buy a straddle around 7-10 days before the event and sell it 1-2 days before the event when IV peaks. This setup can benefit from the stock moving and/or IV increase.

 

Related articles:

How We Trade Straddle Option Strategy
Buying Premium Prior to Earnings
Can We Profit From Volatility Expansion into Earnings
Understanding Implied Volatility
How We Made 23% On $QIHU Straddle In 4 Hours

 

Want to learn more?

 

Start Your Free Trial

What Is SteadyOptions?

Full Trading Plan

Complete Portfolio Approach

Diversified Options Strategies

Exclusive Community Forum

Steady And Consistent Gains

High Quality Education

Risk Management, Portfolio Size

Performance based on real fills

Try It Free

Non-directional Options Strategies

10-15 trade Ideas Per Month

Targets 5-7% Monthly Net Return

Visit our Education Center

Recent Articles

Articles

  • The Wheel Trade

    The “wheel” trade is variously described as a beginner’s strategy, a combination to exploit features of both calls and puts, and as “perfect” solution to the well-known risks of shorting calls, even when covered. The wheel could be defined as any of these, but a larger question should be: Is the wheel an elegant method for making profits consistently, or just a gimmick?

    By Michael C. Thomsett,

    • 0 comments
    • 293 views
  • Chooser Options

    Most options traders see their world as a choice between calls or puts, alone or in various combinations. But there is more. With a chooser option, traders can open a position and decide later whether it will be a call or a put. This is also called an as you like it option.

    By Michael C. Thomsett,

    • 0 comments
    • 287 views
  • Leveraged Anchor 2020 Year In Review

    Steady Options has now been trading the Leveraged Anchor strategy for two years, and, somewhat to my surprise, 2020 went even better than 2019. On the year, Leveraged Anchor was up 31.7%, while the total return of the S&P 500 was 18.4%.

    By cwelsh,

    • 2 comments
    • 952 views
  • Ratchet Options

    The “ratchet option” is so-called because as a series, each successive position activates when the previous option has expired. The trader ratchets up (or down) to the next position. Each one is set up to be as close to the money as possible. It has many names, including cliquet, moving strike, ladder, lock-in, or reset option.

    By Michael C. Thomsett,

    • 0 comments
    • 303 views
  • Steady Momentum 2020 Year in Review

    Steady Momentum Put Write (SMPW) is one of the available subscription services at Steady Options. We launched the strategy in early 2019, so we now have two years of performance to evaluate on both an absolute basis and relative to the strategy’s benchmark, PUTW (WisdomTree CBOE S&P 500 PutWrite Strategy Fund). 

    By Jesse,

    • 0 comments
    • 288 views
  • SteadyOptions 2020 Year In Review

    2020 marks our 9th year as a public trading service. It was an excellent year for us. We closed 130 winners out of 194 trades. Our model portfolio produced 117.1% compounded gain on the whole account based on 10% allocation per trade. We had only three losing months in 2020. 

    By Kim,

    • 0 comments
    • 572 views
  • The Jump-Diffusion Pricing Formula

    One of the more complex areas of options analysis involves pricing formulas. The best known among these is the Black Scholes Model (BSM). This is a widely cited method for attempting to determine what the option’s premium should be, but it is deeply flawed.

    By Michael C. Thomsett,

    • 0 comments
    • 337 views
  • Ranges of Exotic Options

    The standard call and put are well known to all option traders, but many exotic and more advanced options can also be opened. Whether a specific broker allows trading in these, and whether a trader has the necessary trading level, are questions to be addressed. This article just defines many of the exotic options that are possible.

    By Michael C. Thomsett,

    • 0 comments
    • 430 views
  • What To Do Before Committing To Trading

    Trading cryptocurrency has become a very popular and significant part of life. While it’s not for everyone, it’s certainly for an awful lot of people. There’s money to be made and areas to be invested in, and people will do what they can to make either a quick buck or an amazing figure.

    By Kim,

    • 0 comments
    • 574 views
  • Accurate Expiration Counting

    Options traders are rightfully concerned with the number of days to expiration of an option. At the time the position is opened, whether long or short, the issue of time decay must be at the forefront of risk evaluation. But is this performed accurately?

    By Michael C. Thomsett,

    • 0 comments
    • 469 views

  Report Article

We want to hear from you!


There are no comments to display.



Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account. It's easy and free!


Register a new account

Sign in

Already have an account? Sign in here.


Sign In Now

Options Trading Blogs Expertido