TOOLS OF THE TRADE

THE STRADDLE  

The straddle is a non-directional trade that is most typically implemented just before a fixed news event such as earnings.  The structure of the trade incorporates two legs 1) a long call and a 2) long put with both options placed at the money.  The risk is the net debit and the reward is theoretically unlimited.

In order for this trade to succeed, we must have a substantial move in the underlying stock.  The move must be large enough to exceed the net debit.  That is why the trade is applied in conjunction with a news event which can act as a catalyst to move the stock.

We do not care which way the stock moves, just as long as it move big.  The trade should be placed with 30-60 cays until expiration.  We want to take advantage of Gamma by placing the trade closer to expiration and at the money.  Implied volatility crush can destroy the trade if the stock does not move.  If the stock remains stagnant then it will require an adjustment. 

Review the risk graph and you will gain an understanding of the risk and rewards of the position.  Best, Robin

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