High Return with Straddle Strategy

Option Straddle Strategy

A Straddle is one of the most profitable option strategies, there is a lot option premium involved.

Traders who buy a straddle have to pay for it much. They expect that the stock will make a big move. Larger than the debit they have paid.

There are other trades that sell a straddle and receive a credit. We prefer to sell a straddle so that we receive option premium. Because of the risk You manage the trade early though

What is a short Straddle

With this options strategy you sell both a call and a put that have the same strike price and expiration date. The maximum profit is the amount of premium collected by writing the options.

You create a long position when you buy options with the same strike. With long straddles You only start making profit with a huge move in the underlying. We rather sell options to collect option premium.

When do you trade a straddle?

This option strategy works best when it meets at least one of these three criteria:

  • High Implied Volatility
  • The market is in a sideways pattern.
  • Pending news or earnings announcement.
  • Analysts have extensive predictions on a particular announcement.

Analysts can have tremendous impact on how the market reacts before an announcement is ever made. Prior to any earnings decision or governmental announcement analysts, do their best to predict what the exact value of the announcement will be. Analysts may make estimates weeks in advance of the actual announcement, which inadvertently forces the market to move up or down. Whether the prediction is right or wrong is secondary to how the market reacts and whether your straddle will be profitable.

After the actual numbers are released, the market has one of two ways to react: The analysts’ prediction can add either to or decrease the momentum of the actual price once the announcement is made. In other words, it will proceed in the direction of what the analyst predicted or it will show signs of fatigue. A properly created straddle, can successfully take advantage of just this type of market scenario.

We never buy strangles. We sell straddles so that we receive option premium Then you have a much greater probability of profit.

 

Learn how to trade it

Watch the next video and see how to trade Straddles, using the Dough platform. They discus the long and short straddle.

When do you close it?

Of course you can wait until expiration to close the expiration. But when volatility drops and you can trade the straddle back for 50% or less you should do it. Every time you close a trade that is profitable your capital will grow. Key to your success is managing winners.