Eight Option Strategies - Principles and Operation Points of (Wide) Straddle Strategy

The construction method of the straddle strategy is to buy two call options and put options with the same expiry date and the same exercise price. When the stock price rises sharply, the call option can make a profit, and the put option is in an out-of-the-money state; Put options are profitable when stock prices fall sharply, and call options are out of the money; the strategy is profitable when stock prices fluctuate more than the cost of construction.

P&L graph for straddle strategy:


Construction cost = premium for buying call options + premium for buying put options

Since the straddle strategy has two breakthrough directions, no matter up or down, as long as it reaches the cost line of the breakthrough, it can make a profit.

Upper breakeven point = strike price + build cost

Lower breakeven point = strike price - build cost

The sell straddle strategy is just the opposite of the buy straddle strategy, which is to sell two call options and put options with the same expiration date and the same strike price. As long as the market situation does not change drastically, or the volatility range is narrowing, you can get the income of the put option, and it is two income.



Build Profit = Premium for Selling Calls + Premium for Selling Puts

Upper breakeven point = strike price + build cost

Lower breakeven point = strike price - build cost

Margin: At present, domestic options are double-sided, and there is no combined margin (only one side can control the risk)

The wide-straddle strategy, also known as the straddle strategy, is very similar to the straddle strategy, except that one execution price is different, so a trading strategy with lower cost than the straddle strategy is constructed, but at the same time, there is also room for breakthroughs. get bigger.

Expiration P&L chart for the buy straddle strategy:



P&L graph for the sell straddle strategy:



In trading, the issue of strike price and expiration date selection:

1. Strike price

    Under normal circumstances, the middle position of the shock range is selected, one is that there is no preference for upward and downward breakthroughs, and the other is the minimum construction cost to realize the strategy. At the same time, a strategy with an execution price above the market price can be constructed, and there is a downward market preference. (This strategy can be used when there is a downward preference for the direction of the breakthrough, and the probability of a downward trend is high)

2. Expiration date

    The cycle of judging the market and the strategy to be done should be as consistent as possible when it expires. When selling, try to choose near-term contracts, and when buying, try to choose forward contracts. (within liquidity tolerance)

Generally, in the transaction, the short-term wide-straddle strategy is selected when selling, and the long-term straddle strategy is selected when selling. Relatively speaking, the near-term/forward here, from the perspective of 50 ETF option trading, the current month contract or the next month contract can be selected as the near-term contract, and the subsequent quarterly month can be traded as the far-month contract.

The (wide) straddle strategy, as a typical strategy for volatility trading strategies, is still used very frequently. When volatility is at a low level and is trending upward, use a straddle strategy to long volatility, and when volatility is at a high level and fall back down, use a straddle strategy to short volatility. It is a good tool for making breakthroughs to catch the "market" and narrowly fluctuating to collect "rents".

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