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OAP 113: Long Straddle Earnings Option Strategy Backtest Results
December 25, 2020
Often times when new traders go through their first couple earnings cycles and experience large moves in the underlying stock, it can feel almost natural to want to buy contracts via a long straddle earnings option strategy as opposed to selling options the way we teach here at Option Alpha. In today’s show, I’ll preview some of the new research we’ve been doing in the field of earnings trading and cover the results from three major companies we backtested; Apple, Chipotle, and Facebook. I think you’ll find as you listen this episode that your confidence in sticking with these trades for many earnings cycles will go up dramatically.
Key Points from Today’s Show:
- Often times traders go through cycles where the stock makes incredibly big moves.
- This encourages traders to buy long straddles heading into earnings; a long call/put at the money assuming that the stock will make a big move so that you can profit from it.
- However, it is not the case that the stock always consistently moves more than expected in the long term. The market is smart enough to overcorrect and implied volatility always overshoots the expected move, on average.
Case Study 1: Apple
Did a long straddle every time earnings were present, all the way back to 2007 through now. This is a lot of earnings cycles and a lot of different information for Apple. Since then Apple has had a considerable move, which really challenges the validity of the strategies. We entered a long straddle at the money the day before earnings and took it off the next day. The stock was trading at $90; we bought the 90 put and the 90 call and closed it right after earnings were announced the next morning.
- A long straddle in Apple for earnings only ended up winning 41.38% of the time.
- The average return over 10 years was -1.31%.
- Over the long haul, a long option strategy results in a negative expected return, especially in a stock like Apple.
- On the opposite end of this trade, if you had done the short straddle instead of buying options, you would have generated at least 60% of the time and expected a positive return.
- The straddle price before earnings, on average, was $15.
- The straddle price directly after earnings went down to about $7.95; not a great choice for long-option buyers.
Case Study 2: Facebook
Entered the same long straddle position, entering right before earnings were announced and exiting again right after earnings were announced. This strategy only won 27% of the time, which is a huge miss for Facebook percentage-wise. These long options strategy simply do not perform as well as we think over time.
- Had an annual return of 0.70%.
- Only a couple of months ended up being the determining factor to keep it above board.
- If you missed a couple of those really big moves or if Facebook moved much higher than expected, then it would have resulted in a much more negative return.
- On the counter side, if you had traded the short option strategy it would have worked out well, generating a positive expected return.
- On average, the market priced these straddles at about $5.62 before earnings.
- After they announced earnings, the straddle pricing went down to $1.78.
- The key was that the crash in the volatility and the straddle pricing is really why this strategy was a big loser.
- However, this was a really good winner for option sellers.
- The average expected move in Facebook was $6.45 and the actual expected move on Facebook was $7.09.
- Facebook out-performed on average.
- If you could remove the biggest outlier from 2020, then Facebook under-performs by $6.16.
- More recently, Facebook has begun to consistently under-perform its expected moves.
Case Study 3: Chipotle
With Chipotle we used the same strategy as with Apple and Facebook, entering into a long straddle right before earnings and exiting it right after earnings.
- The overall win rate was 35.48%.
- The average annual return was -2.59%, losing a significant amount of money in the trade.
- This again consistently led option sellers to be the beneficiaries of the earnings trade in Chipotle.
- The average price of the straddle heading into the earnings event was 26.26%.
- The stock went from the low 60’s, all the way up to the 600’s and back down to 400 – so the straddles are naturally going to be more pricey.
- On average the straddle price was 26.26 and after earnings the straddle price was 11.21, collapsing by more than half.
- There are huge moves in Chipotle, but they do not overshadow what actually happened in the long term.
- Expected move in Chipotle was 7.01 and the actual move was 5.28 – the market vastly underperformed.
- After big moves, we start to see expected moves and the stock expands and then smaller moves follow.
- Generally speaking, when the stock outperforms the expectation the next couple of cycles end up being fairly quiet.
- If we do find ourselves in a quiet period where the stock has performed really well, we should be careful that it could surprise us shortly.
- Likewise, if the stock has been really volatile and has outperformed and moved more than expected in the last couple of cycles that means we could potentially be more aggressive as it might underperform heading forward.
- Generally, there is also a lag time between the market catching up – earnings trades only happen four times a year.
- The market participants don’t get a lot of data throughout the year to make changes to expectations and trading habits.
- If the stock has a huge move after earnings, more than expected, it might take a cycle or two for the options pricing to catch up and realize the new normal.
- At the end of the day, realizing how much these numbers gravitate towards what they should be on average, long-term is really powerful.
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Option Trader Q&A
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I have a question about debit spreads and credit spreads: given a low implied volatility environment, let’s say below the 50% percentile, would it be more profitable to trade debit spreads or credit spreads? Thanks a lot!
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- 7-Step Trade Entry Checklist [10 Pages]: Our top 7 things you should be double-checking before you enter your next trading. This quick checklist will help keep you out of harms way by making sure you make smarter entries.
Real-Money, LIVE Trading:
- EWZ Iron Butterfly (Closing Trade): After nearly pinning the stock at our short strikes, and thanks to the volatility drop, we netted a $600 profit on this iron butterfly trade.
- VXX Short Call (Closing Trade): One of the most consistent and profitable options trades we can make is shorting pure volatility with VXX and today we closed this naked short call in VXX after a couple days for a $420 profit.
- DIA Iron Condor (Adjusting Trade): This neutral iron condor in DIA is need of a quick adjustment early this week as the market continues to rally. In this video, we’ll discuss why I’m adding an additional put credit spread while also choosing NOT to close out of our current put credit spread due to pricing reasons.
- COP Short Put (Closing Trade): These single short puts in COP acted as a great hedge for our other bearish bets in oil this month and helped smooth out our returns after we closed them for a nice big profit.
- TSLA Put Debit Spread (Closing Trade): Although many people thought we were crazy for getting bearish in TSLA this pre-earnings put debit spread trade made us $200 today. After the huge run up from $140 to $260 and getting some technical sell signals, we were pretty sure this stock would pull back.
- MON Iron Condor (Closing Trade): Following a huge drop in implied volatility we worked hard to close this MON iron condor trade adjusting the order multiple times to fill before the end of the day.
- IBB Call Debit Spread (Opening Trade): We’ll show you how I started searching for a new bullish trade and eventually found a low volatility trade in IBB looking for a move higher to hedge our portfolio.
- TLT Iron Butterfly (Closing Trade): Following the Brexit vote TLT and bonds traded in a nearly $8 range really quickly – even still the drop in implied volatility helped generate a $330 profit for us.
- XBI Call Debit Spread (Closing Trade): Got lucky picking the exact bottom for our entry in this call debit spread for the XBI biotech ETF which ultimately was closed for a profit of $165 today on the rally higher.
- COH Iron Butterfly (Earnings Trade): Shortly after the market open we close out of our COH earnings trade for about a $160 profit, leaving just 1 leg on to expire worthless.
- EWW Debit Spread (Closing Trade): Using some of the technical analysis signals we discovered in our backtesting research, we were able to make a quick $130 profit on this bearish EWW debit spread trade.
- IBM Iron Condor (Earnings Trade): Shortly after the market opened you’ll follow along with me as we watch volatility drop and liquidity come into the market before closing out the position for $250 profit.
- SLV Short Straddle (Opening Trade): Using our watch list software we decided to continue to add to our existing SLV short straddle position with a new set of strike prices reflective of the move lower in the ETF recently.
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Опционная стратегия стрэддл. Как получить прибыль?
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Стрэддл (от анг. straddle) — комбинированная торговая стратегия, подразумевающая одновременную покупку опционов колл (на повышение) и пут (на понижение). Причем цена и дата исполнения опционов должна быть одинаковой.
Иногда стрэддл называют «стеллажом» или «стеллажной сделкой».
Данная стратегия является очень популярной среди трейдеров, особенно во время высокой волатильности (переменности) рынка.
Применяя стрэддл, игрок рассчитывает на получение прибыли при сильном и резком изменении котировок в следующий период. Например, когда на рынке возникает неопределенность в результате таких событий как публикация квартальных отчетов, выход макроэкономической статистики и других.
Опционы могут быть:
— ATM (at the money) — около денег, когда цена исполнения (страйк) близка к базовой котировке. Например, текущая цена на нефть $50. Страйк опциона $50. Опцион около денег.
— OTM (out of the money) — вне денег, когда цена исполнения ниже базовой котировки (не прибыльный). Цена на нефть $50. Страйк опциона колл $70. То есть на текущий момент он вне денег. Если страйк опциона пут $30, значит он также вне денег;
— ITM (in the money) — в деньгах, когда цена исполнения выше базовой котировки (прибыльный). Цена на нефть $50. Страйк опциона колл $30. То есть, если сейчас игрок использует опцион, то он получит прибыль $20 (50-30). Опцион в деньгах. Опцион путт будет в деньгах, если страйк $70.
Для минимизации рисков следует использовать опционы около денег.
Различают короткий и длинный стрэддл. Если игрок покупает опционы, значит, он использует длинный стрэддл, если же продает — короткий.
Короткий стрэддл следует применять тогда, когда волатильность практически нулевая. Если трейдер продает одинаковые опционы колл и пут, он получает прибыль (премию опционов). Когда срок опционов истекает, и на рынке не происходит значительных колебаний, игрок не несет потерь и забирает всю премию. Но если цена резко пойдет вверх или вниз, трейдер будет нести неограниченные убытки. Рассмотрим пример.
Акции «Газпрома» на 1.01 котируются по 140р.
Трейдер продает опционы колл и пут за 10р. и 20р. соответственно. Срок исполния 1.02, цена – 140р.
Сейчас у трейдера имеется 30р. прибыли. Если цена акций до 1.02 не будет выходить за предел, то игрок сможет забрать эти 30р. В обратной ситуации он понесет убытки.
Промежуток цен, при котором трейдер не понесет убытков, колеблется в пределах 110р. (140-30) и 170р. (140+30). Если цена достигнет, например, 190р., убытки составят 20р. (190-70). Другими словами, трейдер должен будет выполнить обязательство по опциону.
С длинным стрэддлом ситуация абсолютно противоположная. Покупая стрэддл, трейдер рискует лишь стоимостью опционов. Но если котировки значительно изменятся, и неважно как (повысятся или понизятся), тогда игрок может получить неограниченную прибыль. Исходя из этого, можно сказать, что длинный стрэддл намного эффективнее, нежели короткий.
Преимущество данной стратегии отображается в следующем примере:
На 1 января акции «Роснефть» торгуются по цене 250р.
Трейдер покупает опционы:
— Колл за 5р.
— Пут за 10р.
Суммарные затраты 15р (5+10).
Цена исполнения опционов — 250р.
Сроки — 1 февраля (как колл, так и пут).
Чтобы покрыть расходы, акции должны подорожать или подешеветь на 15р. Например:
На 7.01 акции «Роснефть» котируются по 265р. Трейдер с помощью опциона колл может купить акции по 250р., и тут же реализовать их по рыночным ценам за 265р.
Обратная ситуация. На 7.01 акции котируются по 235р. Сейчас игрок может продать акции с помощью опциона пут по 250р. и купить их по 235р.
В обеих ситуациях трейдер покроет убытки, то есть выйдет на ноль. Если же до 1 февраля цены останутся в пределах 235-265р., игрок не сможет получить прибыль и понесет убыток в размере 15р. Соответственно, когда цена выйдет из этого предела трейдер получает прибыль.
— Стратегия не сложна для освоения, ее даже можно сравнить с рулеткой (когда игрок одновременно делает ставку на красное и черное;
— Прибыль будет при любых значительных изменениях (рост или падение цен);
— Коэффициент прибыли достаточно высок и достигает 1.85;
— Риск ограничен только премией опционов;
— Для совершения сделок не требуется большая сумма на счете.
— Опционы около денег бывают весьма дорогими;
— Одновременно покупать опционы можно не у всех брокеров. Поэтому есть риск приобретения опционов с различной ценой исполнения;
— Цена актива должна сильно зайти за предел (точку безубыточности), а это происходит не всегда.
Опцион — очень интересный финансовый инструмент. С его помощью игрок может расширить свои возможности на рынке. При грамотном использовании стратегия стрэддл еще более увеличивает шансы на выигрыш. Самое главное, что даже новички могут свободно освоить данный метод торговли и сразу инвестировать собственные деньги, как только зарегистрируют счет.
Виды стратегий опционов
Опционы как реальный вид заработка доступный для большинства людей
Choosing the ‘Right’ Strategy: The Straddle
Oct 28, 2002 11:41 AM EST
The major problem many traders have is determining the direction in which a particular stock will move. Will it go up or down in price? If we knew that, entering a winning trade would be quite simple: You’d buy the stock if it was going up, and you would sell the stock short if it was going to drop. Alternatively, if you knew the stock would rise, you could buy a call (or sell a put); if you knew the stock would head down, you could buy a put (or sell a call).
However, what can we do if we have no idea of which way the stock will move? We could enter a “Delta Neutral” trade, one in which we’ll profit regardless of which direction the stock takes. A Delta Neutral trade is one in which calls, puts and the underlying stock are combined in such a manner that the positive deltas and the negative deltas of each component sum to zero.
The straddle is probably the easiest of the Delta Neutral trades to create. It consists of being long one call and long one put, both with the same strike price and expiration date. The strike prices of the straddle must be purchased at-the-money, or ATM, to be Delta Neutral. If the strikes are at anything other than the stock price, then the trade will not be Delta Neutral; it will have either a negative or positive delta bias, depending on whether the strikes are above or below the stock price.
The idea of the straddle is that as the stock moves up in price, the long call becomes more valuable. Although the long put will lose value at the same time, it won’t lose value as quickly as the call gains value. In addition, there is a lower limit as to just how much value the put can lose — it can only go to zero. Thus, as the stock rises in price, the net effect is that the straddle gains in value.
Of course, if the stock falls in price, the opposite will happen. The long put will continue to gain value while the long call will lose value, but only until it reaches zero. Thus, if the stock loses value, the total straddle position will gain in value. The risk curve for this particular trade at expiration, then, would look like Figure 1. LBE is the lower break-even point, where the trade will generate a profit as the stock continues downward, and UBE is the upper break-even, where the trade will be profitable as the stock rises.
Risk Curve of a Straddle
As you can see in Figure 1, the straddle will be profitable in both significant up and down moves. The only time a potential problem exists is when the stock stands still.
The major problem with a straddle is that it consists of two options: a put and a call. As we’re purchasing both options at the money, the entire value of the two premiums is Time Value. As Time Value is not “real” in that it has no inherent value and it decreases to zero as the option approaches expiration, we have the crux of the problem: The stock must move, and move soon, to recover the money lost by the erosion of time in the trade.
There are two ways the trade will be profitable. First, obviously, the stock’s significant move would increase the value of one option while simultaneously decreasing the value of the other option, albeit at a slower rate. Second, both options could increase in value. The only way that can happen is to have the volatility of the options increase. All other variables in the Black-Scholes Option Pricing Model will affect puts and calls in opposite directions.
If the volatility of the option increases, then the option premium will increase, and the possibility of the stock moving will also increase (the basic concept of what volatility is measuring). Thus, if you can find a stock with relatively low volatility, which is increasing, the value of the straddle will be increasing and the stock will be likely to move either up or down — a double chance for profit.
To be successful in trading straddles, we need to find a stock whose volatility is low but is about to increase as the stock begins to move. This may sound like real guessing at first, but in reality, it is not too hard to discover. The primary, most reliable reason for an increase in volatility and for the stock price to move is news. News can be anything from court decisions to new product discoveries to accounting “irregularities” to earnings announcements.
Of the various news possibilities, earnings reports are the easiest to predict and the most common. Every quarter, each publicly traded company is required by the
Securities and Exchange Commission
to report earnings, meaning there are four chances for the stock to move unpredictably each year. Further, each announcement will tend to be made at about the same point in each quarter.
The natural state of things is for the stock’s price movement, and hence volatility, to be relatively low until some announcement, or the anticipation of an announcement, triggers an uptick in the volatility. Between announcements, a firm’s volatility will tend to be low and then rise as the earnings date approaches, dropping back down after the announcement and subsequent stock movement.
Thus, to enter a successful straddle trade, you only need to determine far enough in advance just when the earnings announcement will be made, enter the trade and then wait for the announcement date. In the normal case, on or about the announcement date, the volatility will spike up and the stock will make its move one way or the other. At that point, you exit the trade.
There are only three calculations necessary to determine the parameters of the straddle. First is the cost of the trade, the maximum loss possible. This is simply the sum of the premiums for both the calls and the puts.
If stock XYZ is trading at $71, the 70 strike call is trading at $3, and the 70 strike put can be purchased for $2.75, the total cost and the maximum possible loss on the trade will be $5.75 ($3 + $2.75 = $5.75) per share, or $575 per position (consisting of one call and one put). (The term “at the money” doesn’t necessarily require the option strike price to be exactly the same price as the stock. As long as you are relatively close, the term will apply for entering a trade. Of course, at expiration, ATM means exactly that: The stock must be exactly at the strike price for the option to be ATM.)
The upper break-even would be simply the strike price ($70) plus the total per-share debit of the trade, $5.75, which equals $75.75 ($70 + $5.75 = $75.75).
Similarly, the lower break-even would be the strike price minus the per-share debit of the trade, or $64.25 ($70 – $5.75 = $64.25).
This gives you the outside parameters for the trade to be profitable — this is if you went to sleep and waited for the options to expire. However, because the trade is really designed to take advantage of a quick uptick in price movement and volatility, you don’t want to stay in the position until expiration. Instead, you will want to exit the trade as soon as the news breaks, as that is when the volatility will tick up, and it is when the stock should move. If you wait much beyond that time, the volatility will calm back down, and the stock may return to its previous price, taking all of your profits from the trade.
The only thing left in designing this trade is to decide just which options to purchase. If you’re trading on an upcoming earnings announcement, you’ll want to enter the trade far enough before the announcement that the average investor isn’t thinking of it, the stock isn’t in the news, and hence the volatility is low and the option prices will be low.
The optimal time seems to be about three to four weeks before the earnings announcement. Then, you want to have enough time in the option so that not too much Time Value is lost for the three to four weeks you’re in the trade. After all, each position consists of being long two options.
Time Value erodes faster as expiration nears. Thus, to prevent as much Time Value as possible from eroding from this position, you’d use options that have significant time left until expiration. The problem here, of course, is that as you go out in time, the price of the option increases, increasing the debit of the trade. If you choose an option expiration date that is about four months out from when you enter the trade, then only about 15% of the Time Value should erode in the three to four weeks you’ll be in the trade. This, of course, assumes that everything else, including volatility, remains constant.
Thus, in our example, the maximum risk that we’d experience is less than $1 if we made sure to exit our four-month Straddle at the earnings announcement date (about four weeks into the trade), regardless of what the stock did.
Here’s a recap of the trade.
1. Look for relatively low implied volatility of the options. It must be low relative to the historic volatility of the options, and preferably below the volatility of the underlying stock.
2. Find an expected catalyst to tweak the volatility upward and to move the stock. Anticipation of an earnings announcement is a good catalyst.
3. If you’re using an earnings announcement, enter the trade before most traders are paying attention — three to four weeks before the anticipated announcement date.
4. Purchase equal numbers of ATM calls and ATM puts for each position. The expiration dates will be the same as well and should be a minimum of 90 days out, preferably 120 days to 150 days from the entry point, to minimize the time erosion from the trade. Put the trade in as a straddle, with your broker specifying the total debit you’re willing to pay. This will ensure that you get the entire position for your price, even if the stock moves slightly and the relative prices of the calls and the puts have changed.
1. Exit the trade upon the issuance of the earnings announcement, regardless of your profit or loss at that time. By holding the position past the announcement date, you will then suffer the double Time Decay of the two options, with no reasonable expectation of anything to move the stock.
2. Exit the trade when you have a 50% profit if the stock jumps before the earnings announcement. This might happen if there’s an unexpected announcement before the earnings release. You don’t want to hang on to the position if it moves quickly, as it could easily settle back down, reducing or eliminating any profits you have in the trade.
3. To exit the position, sell both the put and the call simultaneously. The only exception to this rule is if one of the options is worth very little (say 20 cents or less) and you think the stock may reverse its move. If the winning side of the trade is enough to give you a profit without the losing option, keep the loser as a free lottery ticket — you’ve paid for it in the straddle and its value may increase in the next several weeks or months if the stock retraces its price movement.
4. As with all long option positions, if you violate all the other rules, do
hold on to a long option with 30 or fewer days left until expiration — sell what you have for whatever you can get. Looking at the risk graph, you can see that there’s unlimited profit to both the upside and downside. However, the nature of this trade is such that it seldom returns triple-digit profits. You’re not in the trade long enough to make those kinds of gains. However, it is a reasonable trade to generate steady profits, month after month.
By Andrew Neyens, staff writer and trading strategist at
Long Straddle Overview
The long straddle option strategy is a neutral options strategy that capitalizes on volatility increases and significant up or down moves in the underlying asset.
Another way to think of a long straddle is a long call and a long put at the same exact strike price (in the same expiration series on the same asset, of course). Although many options strategies capitalize on the passage of time, the long straddle is not one of them. Dramatic moves in either direction or sharp volatility spikes are needed for long straddles to be profitable trades. Not to be confused with the long strangle, which involves calls and puts of different strike prices, the long straddle only involves the same strike price options.
- If you purchase a call and a put of the same strike price, it’s considered a long straddle
- Long straddles lose money every day due to theta decay
- Traders usually buy straddles ahead of earnings announcements or binary events, like an FDA announcement
- Long straddles will be profitable with volatility expansion or dramatic up/down moves in the underlying asset
- Long straddles are typically traded at or near the price of the underlying asset, but they don’t have to be
- Ally Invest is the best & cheapest broker to trade long straddles
- Ally charges just $0.50 per contract
Out of every online broker with 24/7 customer service in 2020, Ally Invest the has the lowest commissions to trade the long straddle strategy as well as the best free options trading software. Read the Ally Invest Review.
Long Straddle Option Strategy Definition
-Buy 1 call (same strike price)
-Buy 1 put (same strike price)
Note: Long straddles are always traded with the exact same strike price. If the long call and the long put are different strike prices, it is considered a long strangle.
Long Straddle Example
Stock XYZ is trading at $50 a share.
Buy 50 call for $0.30
Buy 50 put for $0.30
The net amount spent for this trade is $0.60 ($60), the premium from both long options positions.
The best case scenario for a long straddle is for the underlying instrument to completely crash down or surge up. When this happens, volatility tends to expand, and the straddle benefits. If stock XYZ doesn’t budge, the long straddle is going to lose money due to premium decay.
Long Straddle Details
|Maximum Loss||Premium spent|
|Best For||Anticipating a significant up or down move in a stock|
|When to Trade||Before earnings announcements, FDA deadlines, etc.|
|Construction||long call + long put|
|Opposite Position||Short straddle|
Maximum Profit and Loss for the Long Straddle Option Strategy
Maximum profit for a long straddle = UNLIMITED
Maximum loss for a long straddle = PREMIUM SPENT
The maximum profit for long straddle is theoretically unlimited for the upside, and capped at the underlying asset going to zero on the downside.
The maximum loss is always the total sum of the premium spent for buying the long call and put options.
Break-Even for the Long Straddle Option Strategy
There are two break-even points for a long straddle.
The upside break-even point = long call strike + premium spent.
The downside break-even point = long put strike – premium spent.
Why Trade Long Straddles?
The long straddle option strategy a unique way to create a situation with unlimited profit either up or down that has a very conservative and limited loss.
Traders commonly place long straddles ahead of earnings reports, FDA announcements, and other anticipated binary events. The rationale behind placing a long straddle is that the underlying asset is probably going to move sharply in either direction, it’s just too difficult to predict which way it will go.
Margin Requirements for Long Straddles
Because the long straddle option strategy is entirely risk-defined, margin requirements are simple. The buying power requirement for all long options positions is equal to the sum of the option premium. In the case of the long straddle, the total premium spent is the margin requirement, and always will be for the entire duration of the trade.
What about Theta (Time) Decay?
Theta decay for a long straddle is not beneficial at all. If the underlying asset (like a stock, futures contract, index, etc.) doesn’t move at all before expiration, long straddles will lose money because of premium decay. This means timing is very important. If the underlying asset moves after expiration, it won’t do any good.
When Should I close out a Long Straddle?
Because there is an unlimited profit potential on the upside and a very large profit potential on the downside, it is difficult to know precisely when to close out a profitable long straddle. Basically, a long straddle is tantamount to being simultaneously long and short the same asset. Therefore, you should close out a long straddle whenever you would normally close out a long or short position.
If the position is unprofitable, and the option premium has neared zero, there is no reason to close out the trade. There is always a chance that the underlying asset can move dramatically, or volatility can increase, and make the trade profitable again.
Anything I should Know about Expiration?
Yes! Due to the fact the fact that straddles are always traded at the money, either the call or the put is going to expire in-the-money. It’s impossible to both options to not expire ITM.
However, this is not to say that both options cannot expire almost worthless; the long call can expire worthless and the long put can expire with an intrinsic value of $0.01.
Because one leg of a straddle will always expire ITM, this options trading strategy needs additional attention around the time of expiration.
If a long put expires ITM, a margin call could be issued if there is not enough cash in your account to short the appropriate amount of the underlying security at the strike price. Similarly if the long call expires ITM, a margin call could be issued if there is not enough cash in your account to buy the underlying at the strike price.
All potential expiration predicaments with long straddles can be fully avoided by checking expiring options positions the day before and the day of expiration. Depending on your options broker, you will usually be notified of expiring positions that are ITM.
Important Tips for Selling Straddles
On the surface, long straddles seem like the perfect options trading strategy. Who knows if a stock is going to move up or down? Chances are, it’s going to move one way or the other…unless it doesn’t. The only way the long straddle option strategy will not be profitable is if nothing happens prior to expiration, or if volatility collapses.
Therefore, long straddles are very interesting trades for volatile markets with large price swings.
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