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

  • Options: Debt and Net Return

    This is the last in a series of articles about how dividends affect option value and volatility. In picking stocks for options trading, what are your criteria? Analysis of dividends, debt and net return – all fundamental tests – help identify strong value companies (and lower-volatility options) versus weak, high-risk stocks.

    By Michael C. Thomsett,

    • 0 comments
    • 166 views
  • Can you "Time" the Steady Momentum PutWrite Strategy?

    As a financial advisor, investment advisor, hedge fund manager, model developer, and newsletter signal provider for over a decade now, I've had the opportunity to see quite a bit of human nature in action.

    By Jesse,

    • 0 comments
    • 200 views
  • How Steady Momentum Captures Multiple Risk Premiums

    Our Steady Momentum PutWrite strategy attempts to outperform the CBOE PUT index, which writes cash secured puts on the S&P 500. An investable version of this strategy can be purchased with the ETF PUTW. The historical data for PUT extends back more than 30 years, highlighting how writing puts can be an attractive strategy.

    By Jesse,

    • 0 comments
    • 438 views
  • The Effect of Dividends on Options Pricing

    The theory of dividends and underlying stock prices is simple: The underlying price is expected to decline on ex-dividend date, by the amount of the dividend. As a result, option prices should decline as well. Under this theory, calls for higher dividend stocks should be valued lower and puts should be valued higher.

    By Michael C. Thomsett,

    • 0 comments
    • 313 views
  • 5 Ways To Identify Fake Forex Broker Reviews

    Many traders or future traders shop for a broker to work with and find endless reviews on the web, and not all are genuine. Here are 5 ways ways to separate the good from the bad. There are lots of sites that specialize in forex broker reviews and lots of talk about brokers in various forums.

    By Kim,

    • 0 comments
    • 180 views
  • 3 Dividend traps to Watch For

    Dividends are almost universally viewed as positive aspects of stock selection and options trading. The higher the dividend yield, the more positive. But does this ignore some dangers in dividend trends? In fact, there are three ways in which dividends can mislead traders and create positive impressions when in fact, the news is negative.

    By Michael C. Thomsett,

    • 0 comments
    • 248 views
  • Dividends and Options

    Steady Options has received numerous inquires into how dividends impact options, option prices, and the owners or option contracts. The impact of dividends should be understood by any option contract trader.  Fortunately, the rules for option contracts and dividends are clear and straightforward. 

    By cwelsh,

    • 0 comments
    • 283 views
  • When Can You “Trust” a Backtest?

    There's a joke in the financial industry that "nobody has ever seen a bad backtest". There certainly are bad ones, but nobody ever markets them. They just get thrown in the trash. Even academics can fall prey to this.

    By Jesse,

    • 0 comments
    • 230 views
  • Increasing Yield Through Covered Calls

    When starting out with options, a natural place to begin is with covered calls. It’s a very easy to understand strategy for those that are familiar with stock ownership. The strategy involves buying a stock in lots of 100 shares. The total size will depend on you account size and how much exposure you want to take.

    By GavinMcMaster,

    • 0 comments
    • 326 views
  • Alternative Investments: Real Estate Construction

    One of the most common complaints received from investors relates to low yields, low returns and/or the inability to have a reasonable cash flow from investments. This is particularly true for investors who feel that they have too much invested in the stock market.  Many want to diversify into real estate of one form or another.

    By cwelsh,

    • 0 comments
    • 214 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