Use Your Edge - Trade Your Setup
Facebook Twitter

Option Straddles Explained

Leave a Comment / Options / By

Before getting into Option Straddles Explained – you should at least know the very basics of options

  • We want to buy a call option if we think the market/stock is going to move up
  • We want to buy a put option if we think the market/stock is going to move down

Using options you can control a lot of stock for a lot less money.  For example Google which at the time of this writing is trading at $xxx per share – if you wanted to buy or control 100 shares of GOOG it would cost you $500 . But in turn you can control the same amount of shares with an option for a fraction of the price.  $5000 for 100 shares of Goog or $1500 to control 100 shares of Goog with an option

Option Straddles Explained

With Option Straddles you are buying both a Call (stock to go up) and  Put (stock to go down) – the Call hedges or protects the Put and the Put hedges or protects the Call.  So for example if you bought a call option and a put option for the same strike price and the price of the stock at expiration was the same – you would lose your investment that you paid for the call and the put.  If the stock happened to move up a few dollars you would make money on the call and lose money on the put.

With Straddles you have a defined risk and an infinite potential on the trade.

The main reason to use a straddle is if you want to take part in an upcoming event.  One way to take part in upcoming stock news / events such as earning is by buying a Straddle.  And if you buy the Straddle in the middle of its current trading range – you can make a good profit the day following the earnings whether the earnings are good or bad.

Straddle Basics

You would take the consolidation range and find the mid point and then

  • Buy to Open 1 ABC $50 Call Option and
  • Buy to Open 1 ABC $50 Put Option

You will have a debit of aprox $2 or 2 x 100 which equals a risk of $200 dollars

Straddle Profit Loss

And like I mentioned above a great time to use this strategy is before earnings. Earnings anouncements bring a lot of attention and volatility to the stock.  Every stock announces earnings 4 times a year.  You can find earnings calendars online to see which stock is announcing earnings and when.

Examples of Stradle positions on stocks

Generally want to buy the option that is 2 months out – so if its currently December you would want to look at the put and call prices in February.

Visa Example – Oct 29th

Day before earnings 5 day range – take high and low of range – find the aprox mid point which is about 215.

Potential Straddle

Open your option brokerage account – and look for Dec (monthly option chain)  Buy the Dec 215 call and the Dec 215 Put – (I use ThinkorSwim)

Straddle Options Purchase

Earnings are announced after close on 10/29

The next morning you would log into your account and find something like this

Straddle AfterEarnings

Nice return from the day before.  At this poin you can decide if you want to lock in your profit or let it run a bit with a protective stop – In this example it gets as high as +2500.
Not all stocks are going to move like that after earnings some will take more days to get there where others may not move as much as you expected.

Open up a Thinkorswim chart or any other chart that highlights earnings and scroll back and take a look at what the price does after earnings.  You will want to find stocks with lots of volume and stocks that have a past experience of gaping after earnings announcements.

 

***Trading involves and is not suitable for everyone.  Past performance is never indicative of future results.  Trade at your own Risk.  This Article is in no way a recommendation of any kind – please do your own research before making any trading decisions**

Leave a Comment

Your email address will not be published. Required fields are marked *

If you do not agree with any term of provision of our Terms and Conditions you should not use our Site, Services, Content or Information. Please be advised that your continued use of the Site, Services, Content, or Information provided shall indicate your consent and agreement to our Terms and Conditions.

TradingTheSetup may publish testimonials or descriptions of past performance but these results are NOT typical, are not indicative of future results or performance, and are not intended to be a representation, warranty or guarantee that similar results will be obtained by you.

Becoming an experienced trader takes hard work, dedication and a significant amount of time.

Your results may differ materially from those expressed or utilized by TradingTheSetup due to a number of factors. We do not track the typical results of our current or past students. As a provider of educational courses, we do not have access to the personal trading accounts or brokerage statements of our customers.

Available research data suggests that most day traders are NOT profitable.

In a research paper published in 2014 titled “Do Day Traders Rationally Learn About Their Ability?”, professors from the University of California studied 3.7 billion trades from the Taiwan Stock Exchange between 1992-2006 and found that only 9.81% of day trading volume was generated by predictably profitable traders and that these predictably profitable traders constitute less than 3% of all day traders on an average day.

In a 2005 article published in the Journal of Applied Finance titled “The Profitability of Active Stock Traders” professors at the University of Oxford and the University College Dublin found that out of 1,146 brokerage accounts day trading the U.S. markets between March 8, 2000 and June 13, 2000, only 50% were profitable with an average net profit of $16,619.

In a 2003 article published in the Financial Analysts Journal titled “The Profitability of Day Traders”, professors at the University of Texas found that out of 334 brokerage accounts day trading the U.S. markets between February 1998 and October 1999, only 35% were profitable and only 14% generated profits in excess of than $10,000.

The range of results in these three studies exemplify the challenge of determining a definitive success rate for day traders. At a minimum, these studies indicate at least 50% of aspiring day traders will not be profitable. This reiterates that consistently making money trading stocks is not easy. Day Trading is a high risk activity and can result in the loss of your entire investment. Any trade or investment is at your own risk.

Any and all information discussed is for educational and informational purposes only and should not be considered tax, legal or investment advice. A referral to a stock or commodity is not an indication to buy or sell that stock or commodity.

© All rights reserved TradingTheSetup.com

Designed by LeftCoastDigitalMarketing.com