Name: Long Straddle

Setup: Buy (long) Strike A put and Buy (long) Strike A call

Bias: Bullish and Bearish – expecting a big move but unsure of direction

 

Break-Even: Two break-even points:

 

  • Strike A + Debit paid
  • Strike A – Debit paid

Max Profit: Unlimited

Max Loss: Limited: Debit paid

Margin: No margin required

Time Decay: Time decay is an extreme negative effect since it will drop the value of both of your options

Implied Volatility: After you establish the position you want implied volatility to increase so the value of your options increase and to make the necessary move you originally planned for

Notes: Long straddles can be hard to profit from due to the wide move the underlying needs to make before your position gets beaten down by time decay.  Even if you are expecting move such as an earnings announcement or report coming out the options could already be priced so high that it cannot capture the move.  Always make sure you find the price of an at-the-money (ATM) straddle to see how big of a move the market is expecting.  You can use gamma scalping to protect and increase your gains with long straddles (we will touch more on this later).

Featured in Trade Review: None at this time

You Might Like

  • fading the gap

    Fading the Gap: How Large Overnight Moves in SPY and QQQ Play Out During the Trading Day

  • how to trade a bear flag

    How to Trade a Bear Flag

  • Technical Analysis vs Market Conditions

    Technical Analysis vs Market Conditions: How to Know What’s Affecting Your Trades