Question on Pre-Earnings Long Straddles vs. Long Strangles

[drcruz]

Is it more beneficial to be patient and wait for the stock price to be close to a strike price and buy the straddle? Or is there success buying a strangle if the stock prices are between the strike prices as long as you are below Relative Value?

Thanks in advance

[zxcv64]

Good question. I'm not sure if there are any figures which highlight which is better, but both techniques would be successful. The official trades on SO are generally based on long straddles rather than a strangles. If the stock is in between two strikes, then at some point in the next day or so, it is likely to cross over one of the strikes, so one way to play this would be to place a OCO (one cancels other) order on both the strikes. One of them will then get filled.

 

With long straddles its easy to see what the current RV is in relation to the previous history. With stranges, this is more difficult as the RV charts are not based on strangles. So if going with the latter, keep an eye on the RV you are paying and it should always be less than the RV you would be paying for the straddle.

 

Example:

Stock XYZ is trading at 40.4, and the closest strikes are 40 and 41

Kim's alert says that buying a 40 strike straddle is good value at 5%RV

If you buy the 40-41 strangle instead, then make sure it is less than 5% RV.

Edited January 13, 2018 by zxcv64

[drcruz]

Makes sense. Thanks for reply 

[Kim]

Take a look: 

Straddle, Strangle Or Reverse Iron Condor (RIC)?

I highly recommend to spend some time browsing our Education Center, it has a lot of useful articles, sorted by category.

 

[drcruz]

Thanks for the article - good read