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.


A couple of months ago, I wrote and article for Steady Options titled – There’s Volatility To Be Found …. In Turkey. At the time, implied volatility had sky rocketed to 45% amid political turmoil and a falling currency. That level of volatility was a 12-month high, with vol previously being as low as 19%.

 

High volatility such as this provides huge opportunity for option traders. In the article, I detailed out three potential trades for TUR – a Short Straddle, A Poor Man’s Covered Call, a Cash Secured Put and a Bear Call Spread.

 

I ended up going with a Short Straddle, a neutral trade, only to see the ETF drop quite quickly from $34 to $27.

 

As a reminder, a short strangle consists of a short put and a short call placed at-of-the-money. The thesis of the trade is that the stock will remain near the strike price for the duration of the trade and the trader will be able to close the trade for a profit thanks to time decay.

 

However, sometimes things do not go to plan. If the stock makes a large move in either direction, the short straddle comes under pressure.

 

In this example, TUR dropped pretty hard, all the way down to $26 at one point.

 

image.png

Here are the details of the trade and the ensuing adjustment.

 

Trade Date: May 30th

 

Underlying Price: $34.34

 

Trade Details:

 

Sell 2 TUR July 20th 34 Calls @ $1.65

Sell 2 TUR July 20th 34 Puts @ $2.40

 

Premium Received: $820

 

image.png

 

By June 13th, the trade was under a bit of pressure with TUR dropping to $29.72 which was around my initial breakeven point. This was my adjustment point and I adjusted by adding a second straddle at $27.

 

Trade Date: June 13th

 

Underlying Price: $29.72

 

Trade Details:

 

Sell 2 TUR July 20th 27 Calls @ $2.85

Sell 2 TUR July 20th 27 Puts @ $0.80

 

Premium Received: $730

 

At this point the total premium received was $1550 and by adding a second straddle I turned the position into basically a strangle.

 

A better was to do this perhaps would have been to turn it into a standard strangle with short calls at #4 and short puts at $27. This would have reduced the early assignment risk, but luckily I didn’t suffer any early assignment in any case. Just something to keep in mind for next time.

 

BEFORE ADJUSTMENT

 

image.png

 

AFTER ADJUSTMENT

 

image.png

 

 

At expiration, TUR closed at $27.97 which resulted in a net profit of $160. Not a huge profit in anyone’s view, but certainly not too bad for a neutral trade on an ETF that dropped 18%.

 

SUMMARY

 

In summary, this adjustment strategy for short straddles may not be for everyone, but hopefully I have demonstrated to you that it is possible to still achieve a profit even when the underlying makes a big move. In this example, we achieved a small profit, but we did add more risk to the trade in terms of more contracts.

 

Finally, I leave you with some words from Dr. Russell Richards regarding this type of adjustment:

 

“When scrambling to manage a losing trade, especially a losing undefined risk trade, most traders are happy to exit the losing trade at a “wash” or even a small loss. You will have to decide what is appropriate for you, but don’t get greedy when managing losing trades.”

 

What do you think about this trading strategy, let me know in the comments if you’ve tried short straddles in the past.

 

Trade safe,

Gav.

 

Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. He likes to focus on short volatility strategies. Gavin has written 5 books on options trading, 3 of which were bestsellers. He launched Options Trading IQ in 2010 to teach people how to trade options and eliminate all the Bullsh*t that’s out there. You can follow Gavin on Twitter. The original article can be found here.

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

  • Trading Earnings: The Myths and The Reality

    Nothing impacts stocks prices more than company earnings reports. There are many way to trade those earnings announcements. You can take a directional bet if you believe the stock will move (higher or lower). Or you can play it with some of the non directional strategies.

    By Kim,

    • 0 comments
    • 74 views
  • Delta Hedging Your Options Strategies

    All traders begin with an introduction to call and put options.  However, it's rare (apart from short puts) that an experienced trader would use these contracts by themselves. Instead, we primarily trade options spreads. There are many benefits to spreads. The variety of spreads are targeted to various market criteria and market environments.

    By Drew Hilleshiem,

    • 0 comments
    • 279 views
  • Allocating on Blind Faith

    Almost all passive investment strategies are based on the assumption that younger investors should hold more equities as a percentage of their total portfolio. Likewise, as they age and get closer to retirement, the allocation to fixed income assets should grow while equity holdings shrink.

    By Michael Lebowitz,

    • 0 comments
    • 217 views
  • Are Weekly Options a Form of Gambling?

    Options traders do not have to act as gamblers … even though many do. There may be a thin line between trading and gambling, and that line is obscured when it comes to weekly options. If you utilize options to reduce risk, it is smart trading. But if you treat options trading like a bet on red or black in a roulette game, then you’re not hedging; you’re gambling.

    By Michael C. Thomsett,

    • 0 comments
    • 354 views
  • How To Profit From PayPal Volatility

    Many of SteadyOptions members are using the CML TradeMachine backtester. The Trade Machine allows to identify patterns that have repeatedly turned a profit over and over again, then see those results with no room for confusion or doubt. This is how traders profit from the option market — it’s preparation, not luck.

    By Kim,

    • 0 comments
    • 377 views
  • Lessons From Facebook Earnings Disaster

    Last week Facebook (NASDAQ:FB) had the biggest one day drop of market cap in history for a single stock. It erased $120 billion in market value. Of course, the odds of a such a big move are pretty small, but the result can be devastating. We saw that with Facebook. As options traders, what can we learn from this event?

    By Kim,

    • 0 comments
    • 496 views
  • How To Trade Apple Earnings with Options

    Last week Apple Inc (NASDAQ:AAPL) stock reached a one Trillion dollar valuation. A remarkable achievement. Of course there is nothing wrong with just buying the stock and holding it "forever". Today I would like to describe a different way to trade Apple using its options. It will also provide some insights into our trading process.

    By Kim,

    • 0 comments
    • 643 views
  • Revisiting Anchor (Thanks to ORATS Wheel)

    Over the past two months, we have been working on developing a put selling strategy to implement through Steady Options, using Anchor as a partial hedge against market decline.  However, back testing has been quite a pain, at least until I was directed to ORATS Wheel software.

    By cwelsh,

    • 0 comments
    • 392 views
  • The benefits of diversification

    What is the real benefit of diversification? Sometimes it's not completely intuitive to investors. Let me provide an example, using historical data of 2 Vanguard mutual funds, VFINX (S&P 500) and VUSTX (Long term treasuries). For fun, we'll compare the end result to Warren Buffett's performance as well, just to further drive the point.

    By Jesse,

    • 0 comments
    • 425 views
  • Option Trading – Science or Gambling?

    Traders focused in stocks, ETFs, and mutual funds may avoid options for several reasons: Perception of high risk, complexity of the market, dizzying levels of specialized jargon. These concerns are part of the learning curve and can be overcome – if traders look at options trading as science and not just gambling.

    By Michael C. Thomsett,

    • 0 comments
    • 601 views

  Report Article

We want to hear from you!


There are no comments to display.



Your content will need to be approved by a moderator

Guest
You are commenting as a guest. If you have an account, please sign in.
Add a comment...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoticons maximum 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