One of the best things about options straddle strategy is it is non-directional. Thus, you can make money without projecting market direction. So it does not matter whether the prices of stock go up or down in the future. As long as stock price moves somewhere, you can make money. As the majority of stock prices are on the move, the straddle option strategy is worth taking in.
Options Straddle Structure
In a straddle, you simultaneously buy the same number of put and call options that have the same expiration date. The focus is having the profit from the winning option more than compensating for the loss on the losing option.
The option straddle trade moves slowly which can take anywhere from a few days up to one month to work. It tends to work best on stock where there is price consolidation expecting the coming of a breakout followed by considerable price action. For a technical trader, good chart patterns for straddle trade setups are the wedge or triangle formations. This is where the latest lows and highs of daily bar charts come together. You wish to trade an options straddle near a convergence of the two trendlines. The right straddle breakouts come after seeing the pattern forming for around three months.
before you put your options straddle position, also check the implied volatility in the option prices against the stock price’s historical volatility. Ideally, implied volatility must be lower than historical volatility. An excellent options broker can give this information to you.
Finding Options Straddle Candidates
Below is a summer of conditions that you must anticipate in order to determine before considering putting a straddle trade.
- Earnings reports-It is important that options implied volatilities are lower in between company earnings reports because there are no expected big conferences or announcements that might energize price action. When searching for straddle trade opportunities, start by looking at stocks that have upcoming earnings reports during the next fortnight.
- Price consolidation- Comparing the current daily bars’ size with those in the past, obviously the bars are smaller than the historical bars. Go for something with big moves in the past. In consolidation mode, stocks also have lower volumes. Under such conditions, the options are expected to be normally cheaper.
- Cheap options. Cheap here means that the implied volatility in option prices should be less than the underlying security’s historical volatility. A great broker can provide this information.
The options straddle is a safe and stable option trading strategy since you eliminate the need to forecast market direction. It comes with some risks such as the potential of the stock to go nowhere. In this case, time decay on the positions you bought will work against you. However, when you bought when price is cheap and the implied volatility is low, you will have minimal losses. Theoretically, straddle profits are unlimited; however, anywhere between 20% and 50% per trade is easily attainable.
Kim Klaiman is a famous personality in the options trading world. His works on straddle option strategy has been recognized by many traders across the world.