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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.

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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.

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