BULL OR BEAR, WE DON'T CARE!
Resource Guide for Trading Without Predicting Market Direction
Disclaimer
Trading and Options both involve risks and are not suitable for all. Prior to buying or selling an option, you must receive a copy of Characteristics and Risks of Standardized Options. Copies are available from your broker, by calling 1-888-OPTIONS (USA), or at www.theocc.com.
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Past performance is not indicative of future results.
The long straddle option strategy is a market
neutral options strategy that benefits from volatility increases and/or
significant up or down move in the stock price. It's doesn't care whether stock is going up or down as long as it is moving.
Since corporate earning announcement tends to swing stock prices in a big way, we can take advantage of the earnings announcement by creating a Straddle options strategy.
Straddle can be created by buying a Put and Call Option:
If however, the strike prices are difference, it called a Strangle.
Let's assume a stock XYZ is trading at $100 a share.
Buy 100 call for $0.50
Buy 100 put for $0.50
The net amount spent for this trade is $1.00 ($100), the premium from both long options positions.
The best case scenario for a long straddle is for the stock to completely crash down or rally up. If stock XYZ doesn’t move, the long straddle is going to lose money due to time decay.
| Key Considerations | Key Point |
|---|---|
| Maximum Profit | Unlimited |
| Maximum Loss | Cost of Options |
| Risk Level | Low |
| Best For | Anticipating a significant up or down move in a stock |
| When to Trade | Before earnings announcements, FDA deadlines, etc. |
| Number of Options | 2 legs |
| How Build it | Buy Call option + Buy Put option |
This is how a Straddle profit & loss profile look like.
This is how a Strangle profit & loss profile look like.
We don't care if the stock goes-up or goes down. The more it goes up or down, the better.
Long straddles lose money every day due to time decay.
While it is good to trade in anticipation of a good move, it is a good idea to see what happened in the past. If you would have taken the trade in the past, would that have been profitable?
You may want to learn it properly, practice on paper before diving in with real money. You don't want to waste time & resources in making avoidable costly mistakes.
Trading straddles or strangles before earnings is just one of the many ways. FDA announcement is another. Actually, it can be used in situations when you expect a large price move but don't know which direction it will be in.
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