馃攳
Long Straddle Option Strategy - Neutral Options Strategies - Options Trading Strategies - YouTube
Channel: Option Alpha
[1]
Hey everyone.
[2]
This is Kirk, here again at optionalpha.com.
[4]
This video tutorial is for a neutral option
strategy in the long straddle.
[10]
So, let's get right into it here.
[12]
The market outlook for this strategy is just
really looking for a big move in either direction.
[17]
So, if you're going to trade a long straddle,
you really want a huge, huge move.
[22]
You just don't care which direction and sense.
[24]
So, this is really the ideal market neutral
strategy.
[28]
The stock can go up, it can go down.
[29]
As long as it just moves and doesn't stay
right where it is, then this is a great strategy
[34]
for you.
[35]
So again, this is specifically designed for
high volatility conditions where stocks are
[39]
swinging wildly back and forth.
[41]
Now, how to set this up again, is very easy.
[44]
Think about it like purchasing two long options
and just throwing those two options together.
[50]
So, all you're going to do is simply buy a
call option and a put option with the same
[55]
strike price for the same expiration period.
[58]
So, in our example, we're going to buy one
at the money call at 40 strike, and we're
[63]
going to buy one at the money put at a 40
strike as well.
[68]
So again, that same strike price, and that's
where the option payoff diagram really pivots
[72]
here, right at 40.
[73]
So, we're going to buy an option here and
buy an option there.
[76]
Now, you can slide these purchases up or down.
[78]
But most strategies are really centered around
at the money options because we don't care
[82]
which direction it goes, as long as it moves.
[84]
So, there's no real point in sliding it up
here to 50.
[88]
Then you'd be more tilted towards the bearish
side.
[90]
You could slide it down to 30.
[91]
But again, you'd be more tilted towards the
bearish side on 30 and towards the bullish
[97]
side on 50.
[98]
So, what's the risk here?
[100]
Well, the maximum loss occurs if the underlying
stock remains right where it is at expiation,
[105]
so right at the strike prices.
[108]
The maximum risk would occur if the stock
closes and doesn't move anywhere, just closes
[112]
right at 40 in our example.
[113]
In this case, we'd hit the lowest point on
our payoff diagram here, and that would be
[119]
our maximum loss.
[120]
In this case, it would be $400.
[123]
So, if at expiration, the stock's price is
between the strikes, then both options expire
[128]
worthless, so you lose the money that you
outlaid to purchase the strategy.
[134]
The profit potential for this strategy is
of course, unlimited.
[137]
Really, the stock could go up as far as it
wants, it could really go down as far as it
[142]
wants, capped at zero of course.
[144]
But the net profit is the gross profit less
the premium that you paid.
[148]
So as always, if you have a strategy where
you outlay about $400 which is your max loss,
[153]
you have to at least make more than that in
value of the options before expiration, before
[158]
you can start to make money.
[160]
But really, the profit potential for this
strategy is virtually unlimited.
[163]
So long as the stock moves and moves in a
very violent fashion, then you actually are
[170]
going to make a lot of money.
[172]
With volatility, since we want a big move
in either direction, an increase in implied
[177]
volatility would have a very positive impact
on this strategy.
[180]
Now, notice that I would use the word in this
particular slide, "increase in volatility."
[186]
A decrease in volatility is going to not help
our position.
[189]
Again, we are trading a strategy where we
want a volatile stock, so we want increasing
[194]
volatility more rapid and wild movement.
[198]
Decreasing implied volatility or stock that
starts to trade kind of sideways or right
[203]
at 40 is very bad for this strategy.
[206]
So again, increasing volatility is really
what we want.
[209]
Not decreasing volatility.
[212]
Time decay is actually going to have a negative
impact on this strategy as well because again,
[216]
remember that we're buying these options,
so they have a finite life and it needs to
[220]
be a "make it or break it" type of a strategy
where the options need to move quickly or
[225]
the stock needs to move quickly in the right
direction, whether that's up or down.
[229]
But it needs to happen fast.
[231]
It can't slowly and progressively move towards
that area by expiration, or we're going to
[235]
start to see the effects of time decay really,
either way in our profit.
[240]
Now, because this consists of being long two
options, every day that passes without a move
[247]
in the stock's price, actually has double
the impact of time decay.
[251]
So, it's not like having one long call option
or one long put option when we have just single
[256]
time decay to worry about.
[258]
Now, we have time decay to worry about for
both options, so it's kind of "double the
[262]
timetable" that we're working with.
[263]
It needs to happen much, much quicker.
[266]
Breakeven points on these long straddles are
really, really easy to see.
[272]
All you're going to do for the upper level
(because there's two breakeven points on this
[276]
particular strategy) is you're going to take
the long call strike and add the premium.
[280]
So, all you're going to do is take the long
40 strike and add the premium, and that creates
[284]
your breakeven on the upper level.
[286]
On the lower level, you're going to take the
long put price and subtract the premium that
[290]
you got.
[291]
So again, the lower level, we're going to
take the long strike of the put at 40 and
[296]
subtract the premium, and that creates our
breakeven on the bottom sell.
[300]
So, there's two breakeven points on this.
[302]
So long as a stock is moving, (like we've
continued to say in this video) then you're
[306]
going to make money if you hit beyond those
breakeven points.
[309]
Now, let's look at an example real quick.
[312]
If the stock price is trading at say 40, we
are going to buy one 40 call for $200 and
[318]
buy one 40 put for $200 as well.
[322]
Now, the net debit on the trade or the net
outlay of money is $400 because we had to
[327]
buy both of these options.
[329]
The maximum loss we can incur is $400.
[331]
Again, that's if the stock closes right at
our strike price.
[335]
And you can see it visually here on the chart.
[337]
That's our max loss at $400.
[338]
Now, the maximum profit potential is unlimited
because these arrows go up, the stock price
[344]
can go up as high as it wants to go.
[347]
There's no range bound to the high side.
[349]
The low side, its only range bound is zero.
[351]
In which case, you'd still make a really good
profit.
[354]
So, some tips and tricks that I've learned
along the way when trading these particular
[359]
strategies: On the outset, this looks like
an easy winner, a home run even all the time,
[365]
right?
[366]
You're probably watching this video going,
"Wow!
[367]
This is an easy strategy.
[368]
Why don't more people do it?"
[370]
Well, you really want to use these during
periods of low to high volatility versus adding
[375]
during periods of already high volatility.
[377]
So, like I said, you want to enter this position
when a stock is actually fairly calm and is
[383]
predicted to breakout.
[385]
You just don't know which direction is going
to breakout.
[388]
It's not a good idea to add the strategy if
a stock is already making a lot of high volatility
[392]
moves because more than likely, the premiums
are going to be so high anyway that any decrease
[397]
in volatility is going to have a negative
impact on your portfolio.
[400]
So, look to close out the position early if
you get a quick move in implied volatility
[405]
without any underlying movement and underlying
stock.
[408]
So, like I said before, these are "double
the timetable," meaning they have to make
[413]
money twice as fast as a regular option because
you're long two options, so you got twice
[418]
as much time decay factored in.
[420]
So, if you see a quick move early, don't expect
to hold this all the way till expiration.
[426]
Take the money off the table, take the profit,
and live to fight another day.
[431]
So as always, I hope you guys really enjoyed
this video, talking about market neutral strategies.
[435]
As always, if you like this video, please
share it right below here with any of your
[439]
friends, family, or colleagues on any social
network.
Most Recent Videos:
You can go back to the homepage right here: Homepage