Straddles and Strangles - Volatility moves in any direction
- 4.5
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Brief Introduction
Straddles and Strangles are non-directional strategies that can profit from big moves in any directionDescription
STRADDLE & STRANGLE OPTION STRATEGIES
Straddles and Strangles are also Volatility strategies and are very popular strategies. Both these strategies are non-directional, so its possible to profit from a movement in either direction. But the move must come fairly quickly, because we have two Long Options (one on the Call side and one on the Put side), and so our time decay exposure is doubled. Additionally, Vega exposure can be quite large, so this is something to watch for. In general, its best to put on Straddles and Strangles in times of low volatility as measured by the individual Implied Volatility of the stock itself as well as observing the level of the VIX Index. We also look at the "Valley of Death" where the trade can fall into trouble.
Straddles and Strangles fall into two categories of Strategies - 1) Non-directional strategies and 2) Volatility strategies.
In non-directional strategies, you don’t care if the Stock goes up or down. Your strategy profits from a move in either direction. The strategy starts out Delta Neutral – or at least you should try to construct it that way. But this does not mean your position will remain Delta neutral forever. In fact, your position will achieve a +ve Delta or a -ve Delta bias, depending on the stock’s movement. But these strategies have one clear advantage over others. You don’t have to be right in forecasting the direction of stock movement, and that fact alone put Straddle & Strangle strategies in our Favorites.
What you will master
Why are Straddles and Strangles very popular
The pluses and minuses of these strategies
Why these strategies can be deceiving for newcomers to these strategies
What is a good environment for these trades
What is the difference between a Straddle and Strangle
Is one better than the other in certain situations
What are the advantages and disadvantages of these trades
Why is Vega exposure critical
What is the "Valley of death" and how can we avoid it
Detailed analysis of the Straddle setup using Priceline and SPY ETF
Actual trade execution of the SPY Straddle
Trade Management of the SPY Straddle
Adjustments to the SPY Straddle
Learnings from the Straddle trade
Tackling the negatives of the Straddle
Requirements
- Requirements
- All the basic strategies and clear understanding of Vega and Volatility
- Clear understanding of Theta and time decay
Hari Swaminathan
4.5 Raiting
Straddles and Strangles - Volatility moves in any direction
- 4.5
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Straddles and Strangles are non-directional strategies that can profit from big moves in any direction STRADDLE & STRANGLE OPTION STRATEGIES Your strategy profits from a move in either direction....
