Like any fresh and eager trader, when I started trading options I was mesmerized by the super fast price action, the huge percentage moves in such short time. I didn’t really care about the greeks, I just wanted to buy them and make money damnit! It seemed so simple, buy a call, price goes up, make profit! I quickly found to my frustration that this was not the case. Options have their own unique character and behavior, and anyone trading them should seek out a complete education before buying expensive blind lessons from the market. I digress however, because today we’re talking about the strategy of Straddles and Strangles.
I’m going to assume you know the basics of options. If you aren’t up on all the options lingo and greeks, you can check out our Knowledge Center and find the basic vocabulary defined. A straddle is when you buy calls and puts at the same expiration and strike price. A strangle is when you spread them out a bit, usually both just out of the money. For example, if I had a strangle with calls and a puts at a $10 strike, a strangle would be an $11 call and a $9 put. Moving the options out of the money makes the trade a lot less expensive, but the stock needs to move more to show profit.
The very first straddle I tried was on SLV, an ETF that tracks silver. I’d recently made some nice money on naked calls I’d purchased, and lacking any technical analysis skills, I just didn’t know which way the stock was likely to move. I bought some calls and I bought some puts and… the price seemed to freeze. The stock would go up a few cents, then down a few cents. Mocking me by staying still, hovering around my strike price. Needless to say, I lost money on both the calls and the puts. “I bet both sides! How could I lose?” I screamed at myself. I needed a better plan.
A little bit of options education later, I thought I’d found my method. I would trade weekly options, to minimize the theta burn! No ETFs, only securities with a little bit of volatility. Too much volatility and the premiums are too expensive, too little and the stock won’t likely move enough to push a profit. I started my log, and I set out on two weeks, ten trades adventure. Depending on where the price of the stock was, I chose which to strangle and which to straddle. You may want to step back, it’s about to get bloody.
That’s a total loss of 17.6%. Not so hot! Surely I could do better next week if I just chose better stocks!
And that makes for a 44.2% loss on the second week.
What did I learn from those two weeks? I learned that I don’t know how to play straddles and strangles for consistent gains. In fact, I haven’t tried my hand at them since. What I have done is invested some time and sweat into learning not only all I can about options and how they behave, but also in learning technical market analysis skills. The more knowledge and experience I get, the better I am able to gauge and ride the momentum of the stock. While I’m certain there are strategies to make consistent gains from straddles and strangles, I have not found them myself. I have found, however, that the more education I get in reading and understanding the market, the less I find the need to bet both sides of the game.
TRADEPRO Academy (Affiliate Link)
Investopedia Straddles & Strangles
TD Ameritrade Options Straddles vs. Strangles: The Basics of Volatility and Magnitude Strategies
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