9 Minute Read

Options Theory: A Straddle Win

December 21, 2018

By | 1 Comment

Well, that escalated quickly. Last week we highlighted why long straddles were tempting on SPY. Today I want to follow-up to see how the idea fared. First, this was the money statement from my previous Options Theory post that describes why long straddles were so tempting:

“What if I told you the Dec $265 straddle was only trading for $6.90? That’s only slightly over 1 ATR, but you’re getting six trading sessions worth of exposure. Sounds cheap, doesn’t it?”

It turns out the straddle was indeed too cheap. Over the six trading sessions since, SPY fell over $20 or roughly 3x what the long straddle was pricing in last week. That’s a big move! As of yesterday’s close, the Dec $265 straddle position (which expires today) was trading for $17.30.

To be clear, the position value lifted from $6.90 to $17.30, a gain of $10.40 or 150%.

But it wasn’t just the substantial price move that ushered in profits. Implied volatility also lent a hand. Remember, long straddles are bi-directional, long volatility trades. They profit from a big price move and a rise in implied volatility. When we penned the original article, SPY implied volatility stood at 21%. Yesterday it closed at 28%. That means demand for options has surged over the past week which has expanded their premiums.

And that’s a good thing for those who purchased them before the expansion. Here’s a chart of the straddle entry and subsequent moves in price and volatility.

Now, I highly doubt you would have held the straddle all the way until today (expiration day). For starters, you had a modest profit ahead of a very uncertain Fed meeting so prudence may have dictated taking profits before Wednesday. Had the market rallied after the Fed announcement you would have risked giving back all the gains accumulated in the position.

Chalk this up as an insightful case study of what you want to happen after entering a straddle.

Big Price Move + Implied Vol Increase = Long Straddle Profits

With Christmas looming we’re keeping today short and sweet. On a personal note I wanted to thank you all for your readership. I love being a part of your trading journey and am honored to help you along the way. I only get to write because you’re willing to read. For that I will be forever grateful.


Tackle Trading: Financial Freedom is a Journey. Sign up now for a 15-day free trial.

Financial freedom is a journey

The Options Theory series is brought to you by Tackle Trading.

Sign up now and gain unfettered access to all of the quality content and powerful Scouting Reports that our Pro Members enjoy for 15-days absolutely free with no strings attached and let us show you what your trading has been missing.

Sign up now for a 15-DAY FREE TRIAL #


Legal Disclaimer

Tackle Trading LLC (“Tackle Trading”) is providing this website and any related materials, including newsletters, blog posts, videos, social media postings and any other communications (collectively, the “Materials”) on an “as-is” basis. This means that although Tackle Trading strives to make the information accurate, thorough and current, neither Tackle Trading nor the author(s) of the Materials or the moderators guarantee or warrant the Materials or accept liability for any damage, loss or expense arising from the use of the Materials, whether based in tort, contract, or otherwise. Tackle Trading is providing the Materials for educational purposes only. We are not providing legal, accounting, or financial advisory services, and this is not a solicitation or recommendation to buy or sell any stocks, options, or other financial instruments or investments. Examples that address specific assets, stocks, options or other financial instrument transactions are for illustrative purposes only and are not intended to represent specific trades or transactions that we have conducted. In fact, for the purpose of illustration, we may use examples that are different from or contrary to transactions we have conducted or positions we hold. Furthermore, this website and any information or training herein are not intended as a solicitation for any future relationship, business or otherwise, between the users and the moderators. No express or implied warranties are being made with respect to these services and products. By using the Materials, each user agrees to indemnify and hold Tackle Trading harmless from all losses, expenses and costs, including reasonable attorneys’ fees, arising out of or resulting from user’s use of the Materials. In no event shall Tackle Trading or the author(s) or moderators be liable for any direct, special, consequential or incidental damages arising out of or related to the Materials. If this limitation on damages is not enforceable in some states, the total amount of Tackle Trading’s liability to the user or others shall not exceed the amount paid by the user for such Materials.

All investing and trading in the securities market involve a high degree of risk. Any decisions to place trades in the financial markets, including trading in stocks, options or other financial instruments, is a personal decision that should only be made after conducting thorough independent research, including a personal risk and financial assessment, and prior consultation with the user’s investment, legal, tax, and accounting advisers, to determine whether such trading or investment is appropriate for that user.

One Reply to “Options Theory: A Straddle Win”

  1. Avatar RyanThebo says:

    Another approach that I found would have been to leg into a $5 wide bear put debit spread as soon as SPY close below long term resistance on 12/17.

Leave a Reply

Chart Modal

Tackle Trading