4.Strategy3: Practical Application of Straddle Options Strategy

Hello,

In the previous lesson, we learned about the basic concept of the vertical spread strategy and how to implement it using the app. Today, we are going to introduce the third common combination strategy—the straddle options strategy.

1. What is a Straddle Options Strategy?

The so-called straddle options strategy involves simultaneously trading both call and put options with the same expiration date and the same strike price. When implementing a long straddle options strategy, it means buying both call and put options. Since the buyer's loss in options is limited while the potential gains are unlimited, when combining both call and put options, as long as there is significant volatility in the stock price, theoretically, this strategy can be profitable. Therefore, this strategy is suitable for scenarios such as during earnings seasons or the release of important economic data that could impact stock prices. It's particularly useful when it's hard to predict whether the stock price will rise or fall due to the upcoming event, but it's certain that there will be significant price fluctuations.

Here's an example: Let's say the current stock price of AMD is $106. We anticipate a significant price fluctuation in the future. We decided to buy both a call option and a put option with a strike price of $106 that expires on September 1st, 2023. The premium for the call option is $1.76, and the premium for the put option is $1.12. The total cost of this strategy is therefore $2.88.

If the future stock price rises to $109, the call option will be exercised while the put option will be left to expire worthless. The total profit for this strategy would be $109 - $106 - $2.88 = $0.12.

If the future stock price falls to $103, the put option will be exercised while the call option will be left to expire worthless. Again, the total profit for this strategy would be $106 - $103 - $2.88 = $0.12.

It's evident that this strategy can only be profitable when the stock price is outside the range of $108.88 to $103.12 ($106 ± $2.88).

However, if the expectation is for little change in the future stock price, implying a high probability of loss when buying a straddle options strategy, we can choose to implement a short straddle options strategy. This strategy is the opposite of the long straddle; it involves simultaneously selling both call and put options with the same strike price and expiration date.

Let's continue with the example. If we were to sell both the call and put options with a strike price of $106, the maximum profit would be $2.88 which occurs if the stock price finishes at $106 at expiry (the premium received). However, if the stock price goes beyond the range of $108.88 to $103.12 ($106 ± $2.88), the potential loss theoretically becomes unlimited.

2. How to Execute a Straddle Options Strategy Using an App

In practical execution, we can directly use an app to match this strategy with a single click. The app can also calculate the potential profit and loss of the combination. Here's how to operate it:

Continuing with the example, if we want to execute a long straddle options strategy, start by tapping the strategy section at the bottom of the app and then selecting the straddle strategy. This will display all the option combinations for different strike prices. Choose the desired strike price, then select "Buy." The app will automatically calculate the maximum profit, maximum loss, and profit-loss curve for this combination (note that all data in practical application is typically multiplied by 100 due to contract unit considerations, and it includes transaction costs like fees, leading to some deviation from theoretical values).

If you intend to execute a short straddle options strategy, the process is the same. You simply need to switch from "Buy" to "Sell" at the bottom right corner.

Alright, that's all for today's lesson. In the next lesson, we will discuss the practical applications of the strangle options strategy. See you soon!

# How to use combo options to trade earnings season?

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  • icycrystal
    ·2023-10-16
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    thank you for sharing this article on Straddle Options Strategy. options can be dangerous and risky if you do not know how it works. however, once you understand, can earn lots of [USD] [USD] [USD] looking forward to next lesson [smile] [smile] [smile]
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    • koolgal
      Thanks for your wonderful insights 😍😍😍
      2023-10-17
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  • icycrystal
    ·2023-10-16
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    • koolgal
      Thanks for sharing 😍😍😍
      2023-10-17
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    • Universe宇宙
      [ShakeHands]
      2023-10-17
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  • icycrystal
    ·2023-10-16
    @Shyon @Aqa @LMSunshine @koolgal @Universe宇宙 @GoodLife99 @rL @Zarkness retagging as the previous tag is now showing [Helpless] [Helpless] [Helpless]
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    • koolgal
      Thanks for sharing 😍😍😍
      2023-10-17
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    • Universe宇宙
      [ShakeHands]
      2023-10-17
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    • Shyon
      Hey thanks for tagging
      2023-10-17
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  • rL
    ·2023-10-16
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    • Universe宇宙
      [ShakeHands]
      2023-10-17
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    • koolgal
      Thanks for sharing 😍😍😍
      2023-10-17
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    • b1uesky
      thk for sharing
      2023-10-17
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  • koolgal
    ·2023-10-17
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    🌟🌟🌟When it is hard to predict the  movement of a stock especially in earnings season or major economic news like the FOMC meeting, it is good to use a Long Straddle Options Strategy.
    This means buying both Call and Put Options with the same expiration date and same strike price.
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    • koolgalReplying toTiger_Academy
      Thanks for your positive feedback. 😍😍😍 I find Options really interesting and eager to learn more from you.  Many thanks for your clear and succinct explanations too. 🤩🤩🤩
      2023-10-17
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    • Tiger_Academy
      Yes,you are absolutely right,its appropriate to use this strategy when something uncertain is being happen
      2023-10-17
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  • koolgal
    ·2023-10-17
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    🌟🌟🌟However if the expectation is for a limited movement in the stock price, a Short Straddle Options Strategy would be more appropriate.  This involves  Selling Call Options and Selling Put Options at the same expiration date and same strike price.
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    • koolgalReplying toZEROHERO
      Thanks my friend. 😍😍😍. It is good to be cautious especially during earnings season.
      2023-10-17
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    • ZEROHEROReplying tokoolgal
      Naked calls are very speculative trades to be avoided. You keep the premium if the underlying asset is at or in the money at expiration, but you also have the potential for Unlimited Losses. I’ve not done naked calls, only write covered calls to hedge a position. Earnings season even riskier 😨
      2023-10-17
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    • koolgalReplying tokoolgal
      @ZEROHERO can you answer @PhoenixBee whether Tiger allow Naked Calls? Thanks 😍😍😍
      2023-10-17
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  • koolgal
    ·2023-10-17
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    🌟🌟🌟A Big Thank You to @Tiger_Academy for this important lesson on Options Trading which I will share with my Tiger Friends @MeowKitty @CL_Wong @Thonyaunn @Derrick_1234 @AlpineSnow @Taurus Pink @PhoenixBee @Success88 @Zarkness Please join me in this interesting lesson on Straddle Options Strategy.
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    • koolgalReplying toAlpineSnow
      My pleasure 😍😍😍
      2023-10-17
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    • AlpineSnow
      Thanks ⭐️⭐️⭐️
      2023-10-17
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    • koolgalReplying toCL_Wong
      Thanks 😍😍😍
      2023-10-17
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  • Shyon
    ·2023-10-17
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    Thanks for another combination strategy on the options! I learnt that if an investor buys both a call and a put for the same strike price on the same expiration date, they've entered into a straddle position. This strategy allows an investor to profit on large price changes, regardless of the direction of the change.

    Come and learn together my friends. @rL @koolgal @Universe宇宙 @icycrystal @b1uesky @Aqa @GoodLife99

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    • koolgal
      Thanks for sharing your awesome insights 😍😍😍
      2023-10-17
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    • Universe宇宙
      [ShakeHands]
      2023-10-17
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    • ShyonReplying toPhoenixBee
      Hehe thanks for sharing your insights too.
      2023-10-17
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  • Shyon
    ·2023-10-17
    A long straddle is an options strategy that an investor makes when they anticipate a particular stock will soon be undergoing volatility. The investor believes the stock will make a significant move outside the trading range but is uncertain whether the stock price will head higher or lower.
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  • Shyon
    ·2023-10-17
    The strategy has potential to earn income regardless of whether the underlying security increases or decreases in price. The strategy may be useful when major news are anticipated but it is uncertain the direction markets will take events. Investors may mitigate potential losses or downside by hedging their investment (as opposed to entering just a single direction trade.
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    • koolgal
      Nice sharing 😍😍😍
      2023-10-17
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  • MHh
    ·2023-10-16
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  • Khikho
    ·2023-10-16
    当实施多头多空期权策略时,这意味着同时买入看涨期权和看跌期权。由于买方在期权上的损失是有限的,而潜在的收益是无限的,当结合看涨期权和看跌期权时,只要股价有显著的波动,理论上,这种策略是可以盈利的。因此,这种策略适用于收益季节或可能影响股价的重要经济数据发布等情况。
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  • TimothyX
    ·2023-10-16
    如果未來股價升至109美元,看漲期權期權將被行使,而看跌期權將一文不值。這種策略的總利潤將是109美元-106美元-2.88美元=0.12美元。


    如果未來股價跌至103美元,看跌期權將被行使,而看漲期權期權將一文不值。同樣,這種策略的總利潤是106美元-103美元-2.88美元=0.12美元。


    很明顯,這種策略只有在股價在108.88美元至103.12美元(106±2.88美元)的範圍之外時才能盈利。
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  • Aqa
    ·2023-10-16
    As long as there is significant volatility in the stock price, theoretically, Straddle Options Strategy, by buying both call and put options, can be profitable. Thanks[love you] @icycrystal [love you]
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  • Shyon
    ·2023-10-18
    Time decay, or theta, works against the long straddle strategy. Every day the time value of the long options contract decreases. Ideally, a large move in the underlying stock price occurs quickly, and an investor can capitalize on all the remaining extrinsic time value by selling the option.
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  • Shyon
    ·2023-10-18
    A sharp rise in implied volatility typically accompanies large moves in stock prices. This benefits the long straddle because the strategy depends on both movement in the underlying security’s price and higher implied volatility to collect larger premiums when the trade is exited.
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  • Shyon
    ·2023-10-18
    Long straddles are market neutral and have no directional bias, but require a large enough move in the underlying asset to exceed the combined break-even price of the two long options. Long straddles require a significant price change or increased volatility before expiration to realize a profit.
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  • koolgal
    ·2023-10-17
    🌟🌟🌟Today we learn Straddle Options Strategy.  This involves trading both call and put options with the same expiration date and the same strike price.
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  • derickt
    ·2023-10-17
    thanks for sharing. I will try the straddle strategy with my demo account to master it 😊
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  • Success88
    ·2023-10-16
    Thanks for sharing i have learn something
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