SteadyOptions is an options trading forum where you can find solutions from top options traders. Join Us!

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

Straddles - Risks Determine When They Are Best Used


Risk all too often is defined by the attributes of a strategy, and nothing more. However, the circumstances under which a position is opened is a better indicator of actual risk. Why? Because risk is not fixed but varies based on proximity of price to strike, and of strike to resistance or support.

The straddle is a good example of how risks may be defined by the conditions of the underlying and its price movement in the all-important proximity status; and time remaining until expiration.


In the case of a long straddle (one long call and one long put with the same expiration and strike), you need significant price movement in order to exceed a breakeven price. There are two breakeven prices, one above the call's strike, and one for the put below the put's strike. These points are equal to the total debit paid for the straddle, combining both call and put, after adding trading fees. So the time remaining determines the potential for the position to become profitable; and the longer the time, the higher the cost.

long straddle


For example, as of the close on June 28, the following positions could have been opened on Boeing (BA), which closed at $334.65:

            8-day expiration, July 6:

                        335 call, ask 5.15, plus trading fees = $520

                        335 put, ask 5.35, plus trading fees = $540

                                                Total cost $1,060

            22-day expiration, July 20:

                        335 call, ask 9.00, plus trading fees = $905

                        335 put, ask 8.85, plus trading fees = $890

                                                Total cost $1,795

 

The 8-day term to expiration requires movement either above or below the strike of 10.60 points. Breakeven prices are $345.60 (above) and $324.40 (below). That is a significant price range to accomplish in only 8 days. And given the fact that expiration week has only 4 trading days (due to the July 4 holiday), time decay will be exceptionally rapid that week. The odds are against this position becoming profitable in such a short term.


The 22-day expirations require 17.95 points of movement to reach breakeven. That means the stock must reach a price of $352.95 (above) or $317.05 (below) to reach breakeven.


This is the long straddle dilemma. Either expiration comes up too soon or price is too high, each making profits less likely.


A long straddle is a risky strategy of these combined problems. With this in mind, the only time a long straddle makes sense is when the underlying is a high-volatility stock, or when you expect it to become high-volatility, even in the short term. For example, if a company has a history of earnings surprises and a relatively narrow trading range, a long straddle may be set up to take advantage of price movement in either direction if earnings are better or worse than analysts' expectations. However, this is a speculative strategy even in these circumstances.


A short straddle may be considered very high-risk because one side or the other will end up in the money. This is speculative, of course. However, there is one condition in which the short straddle's risks may be mitigated. When the stock is in a period of consolidation, and attempted breakouts have failed over a period of many months, a short straddle is more likely to succeed, with the stock price remaining between resistance and support. So a straddle with strikes within those levels has a chance of ending up profitably, as long as consolidation holds. However, a trader would want to keep an eye on further attempted breakouts and be prepared to act if a breakout were to succeed. Actions may include closing the side that has moved in the money, rolling forward, or covering the exposed side (for example, if the call moves in the money, buying 100 shares or buying a later-expiring long call provides cover).


short straddle

The advantage in a short straddle is that in selecting short expirations, time decay will be rapid. The Friday before expiration is a perfect time for opening a short straddle. Between Friday and Monday, the average option loses one-third of its remaining time value. And with the Wednesday holiday in the week before July 6 expiration, a short straddle remains speculative, but could be profitable just based on rapid time decay.


For example, Boeing reported the following ATM option values for the July 6 expiration cycle:

            8-day expiration, July 6:

                        335 call, bid 4.85, less trading fees = $480

                        335 put, bid 5.00, less trading fees = $495

                                                Total cost $975

 

The short straddle sets up a limited profit range equal to 9.75 points in either direction, between the underlying prices of $344.75 (above) and $325.25 (below). Again referring to exploiting time decay, the underlying can range anywhere between these breakeven prices, and both sides of the short straddle can be closed at a profit. This is due to time decay on both sides, as long as underlying movement is not too rapid. This is the wild card in the position, of course.


If the underlying price moves in the money on either side beyond the extent of the price buffer (9.75 points), one side ends up in the money. It has to be closed at a small profit (due to time decay) or a small loss; or rolled forward. If the price trend continues, it spells trouble for the short position still in the money.


With these risks in mind, it could make sense to close earlier rather than later to avoid the problem. With the 4-day week ahead, the timing is excellent; that does not mean the risk have disappeared.


The point is, "risk" is not limited to the attributes of the position (long or short). It also includes proximity to resistance and support, time to expiration, volatility of the underlying, and the price pattern in effect (a consolidation trend, for example).

Michael C. Thomsett is a widely published author with over 80 business and investing books, including the best-selling Getting Started in Options, coming out in its 10th edition later this year. He also wrote the recently released The Mathematics of Options. Thomsett is a frequent speaker at trade shows and blogs on his website at Thomsett Guide as well as on Seeking Alpha, LinkedIn, Twitter and Facebook.

 

What Is SteadyOptions?

12 Years CAGR of 115.5%

Full Trading Plan

Complete Portfolio Approach

Real-time trade sharing: entry, exit, and adjustments

Diversified Options Strategies

Exclusive Community Forum

Steady And Consistent Gains

High Quality Education

Risk Management, Portfolio Size

Performance based on real fills

Subscribe to SteadyOptions now and experience the full power of options trading!
Subscribe

Non-directional Options Strategies

10-15 trade Ideas Per Month

Targets 5-7% Monthly Net Return

Visit our Education Center

Recent Articles

Articles

  • When Investors Lose Their Nerve

    It was a rough end to the week for markets, with a sharp sell-off on Friday reminding investors just how quickly sentiment can turn. For anyone who sold in late summer anticipating a correction and then bought back in at the start of October, that one-day drop might have felt like confirmation that they can’t win.

    By Kim,

    • 0 comments
    • 411 views
  • Uncovering Common Cryptocurrency Trading Mistakes For Beginners

    Are you tempted by the shining allure of crypto trading? You aren’t alone. Decentralized cryptocurrencies hold perhaps the most tempting investment pull of a generation, especially amongst young or beginner investors. After all, by painting a different way to buy and sell, cryptocurrency offers something new that we’re all keen to get in on. 

    By Kim,

    • 0 comments
    • 6976 views
  • Buy Call, Sell Put Strategy Explained | SteadyOptions

    The Sell Put And Buy Call Strategy is an example of a synthetic stock options strategy: using call and puts options to mimic the performance of a position, usually involving the purchase of a stock. We saw this when looking at the synthetic covered call strategy elsewhere.

    By Chris Young,

    • 0 comments
    • 67683 views
  • Long Straddle Options Strategy | Maximize Profits with Big Moves

    Straddle Options Definition
    An options straddle strategy is buying (or selling) both a put and call option with the same strike price and expiration date for the same underlying asset, and paying both the put and call premiums.

    By Pat Crawley,

    • 0 comments
    • 68205 views
  • Gamma Scalping Options Trading Strategy

    Gamma scalping is a sophisticated options trading strategy primarily employed by institutions and hedge funds for managing portfolio risk and large positions in equities and futures. As a complex technique, it is particularly suitable for experienced traders seeking to capitalize on market movements, whether up or down, as they occur in real-time.

    By Chris Young,

    • 0 comments
    • 30972 views
  • Long Gamma vs Short Gamma: Options Strategy Explained

    Gamma is one of the primary Options Greeks, which measure an option's sensitivity to specific factors that could affect an option price. Despite traders hyping up several different Greeks and second-order Greeks like "Vanna" and "charm," there are only four primary Greeks that you need to be familiar with to understand options trading.

     

    By Pat Crawley,

    • 0 comments
    • 50539 views
  • Predicting Probabilities in Options Trading: A Deep Dive into Advanced Methods

    In options trading, the focus should not be on predicting the exact closing price of a ticker on a given date - a near-impossible task given the pseudo-random nature of markets. Instead, we aim to estimate probabilities: the likelihood of a ticker being above a specific value at a certain point in time. This perspective turns trading into a probabilistic exercise, leveraging historical data to make informed decisions.

    By Romuald,

    • 1 comment
    • 17221 views
  • SteadyOptions 2024 - Year in Review

    2024 marks our 13th year as a public trading service. We closed 136 winners out of 187 trades (72.7% winning ratio). Our model portfolio produced 116.7% compounded gain on the whole account based on 10% allocation per trade. We had only one losing month (of 0.6% loss) in 2024. 

    By Kim,

    • 0 comments
    • 6575 views
  • Wheel Strategy Options: Master Wheel Trading Explained

    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 options wheel strategy is an income-generating options trading strategy that both beginners and experienced traders can leverage for profit.

    By Pat Crawley,

    • 0 comments
    • 76630 views
  • Why Dollar Delta Will Change Your Trading

    Delta is one of the four main option Greeks, and any serious trader needs to have a thorough understanding of this greek if they hope to have any chance of success in the trading options. If you’re a beginner, you can visit my blog to learn more about understanding option delta

    By GavinMcMaster,

    • 0 comments
    • 36755 views

  Report Article


We want to hear from you!


There are no comments to display.



Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.
Note: Your post will require moderator approval before it will be visible.

Guest
Add a comment...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...

Options Trading Blogs