Options Straddle Strategy Introduction
The goal of this post is to get everyone comfortable with what a straddle is. A straddle is just a great way to get a measure of the volatility that's in the market. Whenever we see a straddle (we'll start at the top, right of this chart), stock price 40, this should be 40 strike and 40 strike puts. If they're 250 each, the straddle would be $5. A lot of times I'll say there's a 10% straddle or 15% straddle, this is all I'm referring to. The $5 is 12.5% of 40. Looking at the column chart above the graph, if we bought the calls and bought the puts, our max loss would be $5 and then we would need it to get under 35 or over 45 in order for us to profit. If we sold the straddle, we'd want everything just to be quiet. We'd be short volatility. When you're short volatility, you just want no movement. You want everything to be super, super quiet.
Buy a call and buy a put, then we’re long the straddle. We're expecting movement, we're expecting volatility. Upside here is unlimited. Our downside is whatever we pay for the straddle. Time passing hurts when we are long a straddle. Every day that goes by where our straddle doesn't move is hurting our position.
Two examples here. I just took Apple and Chipotle, both five days to expiration. These are the weeklies. Five days, five days. The exact same amount of time until expiration. We can see Apple, the 119 straddle is about $2.25. That would be $2.25, so a 1.9% straddle. 2.5% straddle on Apple. But then we look at Chipotle. Chipotle is dealing with some news issues. Their stocks have been getting crushed because of some alarming news (This example is from when their E-coli incident happened).
How I Look at Straddle Prices
Whenever I look at a stock that's $535 or a stock that's $5.35, you could just make that stock $53 in your head. You don't have to look at it so it's $535. If you make it $53.50 cents, and you're more comfortable, which I am, then I think of the straddle as $3.18 cents just because I'm not used to looking at straddles that are $535. I do the same thing when I'm looking at stocks that are $2 or $3. In my own mind, I'll make them $20 or $30 because that's how I want to look at them. Sometimes people look at a $2 stock and 20 cents doesn't feel like such a big move, but then if we make it $20 in our heads, $2 is a big move. That's just a little trick that I use when I'm looking at really high priced stocks or really low priced stocks. I hope everybody can see just the difference in volatility between these two names and therefore, the difference between the straddle prices.
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