Video Description:
This video covers the basics of the long straddle and strangle.
Long straddles and strangles involve the purchase of a call and a put
at the same time with the same expiration date. The long straddle will
have the same strike price for the call and the put. The long strangle
will have different strike prices, normally the strikes for both options
are out-of-the-money.
A long straddle example:
XYZ @ 50
Buy 1 XYZ 15-day 50 Call @ 3.60
Buy 1 XYZ 15-day 50 Put @ 3.50
Net Debit 7.10
At expiration:
Max Profit = Unlimited
Max Loss = 7.10 (debit paid)
Total Commission $6.25
A long strangle example:
XYZ @ 52.50
Buy 1 XYZ 15-day 55 Call @ 2.75
Buy 1 XYZ 15-day 50 Put @ 2.50
Net Debit 5.25
At expiration:
Max Profit = Unlimited
Max Loss = 5.25 (debit paid)
Total Commission $6.25
**NOTE:
option prices are given as a per contract amount. Multiply loss and
gain figures by 100 shares and by the number of contracts traded to
determine the amount of the full potential loss or full potential gain.
No additional calculations are needed to determine commission costs.
Regards,
Brian Overby
TradeKing Options Guy and Senior Option Analyst www.tradeking.com
Follow Brian on Twitter or visit TradeKing on Facebook and YouTube.
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lagoonboy posted September 11, 2012 (11:31PM)
I've been looking for such a treatment for a while, and haven't found so much explained so well and so succinctly in print or on the web - until I landed here!
2) Incidentally, I came here as I remembered your excellent "Options Playbook" and was very disappointed to find just a few copies on Amazon and some crazy prices.
I know you've done an excellent job of putting the material online at
http://www.optionsplaybook.com/
but for those who like to annotate paper pages can I suggest you mount it on a self-publishing website like Lulu.com, and for the mobile crowd maybe put it on Kindle or iBooks for $5 or so.
The material is so valuable, its a pity that people coming to Amazon can't give you any money to get either a print or digital copy.
Just an idea.
3) Incidentally, would a quant ever try to figure out a more elaborate options strategy where they add to the straddle in such a way that the loss over that limited range around the ATM point is somehow compensated by profits from additional options positions?
Or is such a thing doomed to fail?
I thought about adding some short options somehow, but sadly they seem to neutralise the straddle's lovely profits if the stock does tank or soar.
4) Does your brokerage discourage people who are too keen to put on straddles?
At another brokerage they seemed to be monitoring straddle activity and warned against putting on more than 5 in 5 days unless some minimum amount was in the account.
Why do they get hostile to too many straddles in a certain period of time?
If the maximum risk has already been paid, I can't see why they're getting upset.
What does TradeKing say about this?
What's their policy?
Why does day-trading using straddles annoy them?
I would have thought that they'll get more income from more commissions if they allow more trades, and the trader has paid for the maximum amount at risk upfront, so there's no risk.
What am I missing?
Thanks again for the great presentation.
LB
optionsguy posted September 17, 2012 (02:40PM)
1) That was an excellent exposition on straddles and strangles.
I've been looking for such a treatment for a while, and haven't found so much explained so well and so succinctly in print or on the web - until I landed here!
Thank you for the kind words. It is good to know someone is watching.
2) Incidentally, I came here as I remembered your excellent "Options Playbook" and was very disappointed to find just a few copies on Amazon and some crazy prices.
I know you've done an excellent job of putting the material online at
http://www.optionsplaybook.com/
but for those who like to annotate paper pages can I suggest you mount it on a self-publishing website like Lulu.com, and for the mobile crowd maybe put it on Kindle or iBooks for $5 or so.
The material is so valuable, its a pity that people coming to Amazon can't give you any money to get either a print or digital copy.
Just an idea.
It is for sale for $25 on the amazon site. Just make sure you are looking that the 2nd edition http://www.amazon.com/The-Options-Playbook-Expanded-Edition/dp/0615308147
We do want to at least make a kindle version at some point, no ETA though.
3) Incidentally, would a quant ever try to figure out a more elaborate options strategy where they add to the straddle in such a way that the loss over that limited range around the ATM point is somehow compensated by profits from additional options positions?
Or is such a thing doomed to fail?
I thought about adding some short options somehow, but sadly they seem to neutralise the straddle's lovely profits if the stock does tank or soar.
Hedging is always a fine line with any strategy. I have heard of people on apple doing butterflies and then buying an extra put and call on the wings. It makes profit and loss graph that looks like a “Capital W”. It gets complicated in a hurry trying to explain it.
4) Does your brokerage discourage people who are too keen to put on straddles?
At another brokerage they seemed to be monitoring straddle activity and warned against putting on more than 5 in 5 days unless some minimum amount was in the account.
Why do they get hostile to too many straddles in a certain period of time?
It is usually not the fact that it is a straddle in general is being place. It is just the “Day Trading Rule” that FINRA has put in place. All brokerages have to implement it. Here is a link that explains what it is. So would not matter if you sold credit spreads or just bought stocks outright. If you are buying and selling on the same day there is a bunch of account standards at have to be met.
If the maximum risk has already been paid, I can't see why they're getting upset.
What does TradeKing say about this?
What's their policy?
There is not policy about a specific strategy like the straddle. The only rule that might apply is the pattern day trader rule.
Thanks again for the great presentation.
Thank you for your questions.
Regards,
Brian (Og)
Nick Br posted December 12, 2012 (10:58PM)
Great video. I have seen few other videos on straddles and strangles. The worst of them being which only explain what straddle and stangle are and stop right there. (Anybody can google that)
I liked that you mentioned where Strangle might be useful (i.e a longer period of time..totally makes sense).
I wish you could also add when to buy a straddle...months before the "event" when IV is low (but you will suffer time decay twice in that case). Or should you buy 1 week before earnings in which case you are paying high premiums for the volatility. It would be great if you could give a suggestion on the timing or any other factors to keep in mind.
-Thanks again
Nick
GIE posted March 15, 2013 (11:19AM)
Current Stock Price: 52.50
OPTION A: Straddle
Buy Call @ 50
Buy Put @ 50
BE: 50 - Cost or 50 + Cost
OPTION B: Strangle
Buy Call @ 55
Buy Put @ 50
Cost is reduced
BE: 50 - Reduced Cost or 55 + Reduced Cost
It looks like the strangle could allow the trader to bias the trade when he has better than a 50%/50% idea of the direction. Using the strangle prices from the video, say the stock is at 52.50, and the straddle would require buying both call and put at 50. Since the call would be considerably more expensive below the current stock price of 52.50 because of its intrinsic value, buying the call at 55.00 instead lowers the total cost such that if the stock drops, the trader will see profitability sooner since the BE point on the put side (i.e. 50 - cost), will have a steeper slope leading to quicker profitability as a result of the reduced cost. This type of straddle appears to be a good option if the investor is relatively sure that the stock price will drop. In exchange for quicker profitability if the stock moves in the predicted direction, significantly more movement is required to break even if the stock moves the other direction since what would be the bottom of the V is dragged to the left.
Now suppose the following.
Current Stock Price: 47.50
OPTION A: Straddle
Buy Call @ 50
Buy Put @ 50
BE: 50 - Cost or 50 + Cost
OPTION B: Strangle
Buy Call @ 50
Buy Put @ 45
Cost is reduced
BE: 45 - Reduced Cost or 50 + Reduced Cost
Similarly, if the stock price is just below the strike prices for the straddle being considered, dropping the put price below the current stock price would reduce the overall cost and allow the trade to see profit more quickly on the call side if the trader is relatively confident that the stock price will rise.
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