Straddles, are they ever profitable?

Kibitzer said:
I have been long straddles as a stand-alone position for earnings play, when I thought the move was going to be greater than the cost.


I think that characterizes most traders' approach to straddles. Pretty simple.

e.g. looking over the list of companies reporting earnings this coming week :

https://biz.yahoo.com/research/earncal/20160706.html

The only one that interests me is WBA

http://finance.yahoo.com/news/walgreens-boots-wba-q3-earnings-125312210.html
http://stockcharts.com/h-sc/ui?s=wba

Trade #1
with WBA at 83.06
July 83 straddle for a net debit of $489

Price...... Profit / Loss...... ROI %
62.25......... 1586.00.......... 324.34%
70.23........... 788.10.......... 161.17%
78.11............... 0.00............. 0.00%
78.63............. (51.80)........ -10.59%
83.00............ (489.00)..... -100.00%
87.03.............. (86.30)...... -17.65%
87.89................. 0.00........... 0.00%
95.43.............. 753.60....... 154.11%
103.83........... 1593.50...... 325.87%

So to be successful with the straight straddle WBA will need to be below 78.11 or above 87.89 before expiration on 7/15(12 days). The problem, of course, is the cost of the combined long call and put is too high and makes a profitable trade unlikely. The people who want to sell you these options can see the chart as well as you can and they have no desire to give money away.

Trade #2
with WBA at 83.06
July 83 straddle plus a short call at 86 and a short put at 80 for a net debit $246

Price............. Profit / Loss........ ROI %
60.00................... 54.00................62.25
69.12................... 54.00............ 21.95%
78.71................... 54.00............ 21.95%
80.00................... 54.00............ 21.95%
80.54..................... 0.00.............. 0.00%
83.00................. (246.00)....... -100.00%
85.46...................... 0.00............. 0.00%
86.00.................... 54.00............ 21.95%
88.31.................... 54.00............ 21.95%
97.90.................... 54.00............ 21.95%
107.50.................. 54.00............ 21.95%

In this case I will be profitable if WBA is above 85.46 or below 80.54 but at the cost a greatly limiting my potential profit. IMHO the limitation is realistic in terms of the potential movement of the stock in the next 12 days. My broker charges me the same commission for either trade.
 
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shodson said:
I've recently started selling straddles right before earnings announcements. Here are my results so far
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Too small of a sample size to make any inferences, but you have a 78% win rate...with an average loss of about $200. It looks like your average win is about $144 per trade.
I'll bet that with more trades, the win rate will decline and the average loss will be about twice the average win.
 
syswizard said:
Too small of a sample size to make any inferences, but you have a 78% win rate...with an average loss of about $200. It looks like your average win is about $144 per trade.
I'll bet that with more trades, the win rate will decline and the average loss will be about twice the average win.
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True that. BUYERS of straddles will get screwed due to volatility crush. Fuck straddles. I have better odds with single directional trading.
 
TradeCat said:
True that. BUYERS of straddles will get screwed due to volatility crush. Fuck straddles. I have better odds with single directional trading.
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I think syswizard was referring to shodson's earnings play, i.e. SELLING instead of buying straddles just prior to earnings.
As pointed out, selling straddles prior to earnings is obviously risky as the large price movement can well exceed the gain from the IV crush.
I guess the question is, on average, which is more profitable? They can't both be losses.
Personally I have been testing selling strangles at earnings with some success. Apologies for not having the exact stats as sample size is too small to conclude anything for now.
 
You can't just go selling any old straddle before earnings, you need to have the right conditions in front of you to increase your chance of success.

As far as buying straddles, I've heard of some people buying straddles about 2 weeks before earnings with some success, then selling them right before earnings. They are buying the possibility that there will be

1) a large price move into earnings, and/or
2) an increase in implied volatility

both which will increase the value of the options, hopefully overcoming the theta decay. But this is not something I have tried myself.
 
My issue with buying straddles in the US is the IV drop. As the market rises IV drops. Like trying to swim up a waterfall IMO.

Even if the options were priced correctly so that at expiry the payout would be in line with historical data. What I mean is that if I placed 100 Trades randomly (calls) then my account in theory would be at the same balance. It still doesn't take into account trying to close out a trade early.

There were a few straddles that I brought 1 month out that closed out after 1 week for a 50% return (happy days BTW). Had that been US tho I probably wouldn't have made anything. Because the call options drop in IV as the market goes in their favor.

This might be good and well if you hold till expiry, not if you want to close out the trade early tho.

Now this might be offset by the puts rising in value as the market goes in their favor. However it kinda defeats the general idea of the straddle and that is to make a profit in either direction. If your going to aim for profit in the underlying dropping mbey there are some other strategies to look into.

Just my thoughts but I'm a buyer only, and I seriously don't understand how sellers of calls aren't driving around in ferraris! I mean I watch calls on the ES barely moving as the market goes up and then as the market goes down suddenly they drop in value :).

Just my opinion.
 
CBC said:
My issue with buying straddles in the US is the IV drop. As the market rises IV drops. Like trying to swim up a waterfall IMO.

Even if the options were priced correctly so that at expiry the payout would be in line with historical data. What I mean is that if I placed 100 Trades randomly (calls) then my account in theory would be at the same balance. It still doesn't take into account trying to close out a trade early.

There were a few straddles that I brought 1 month out that closed out after 1 week for a 50% return (happy days BTW). Had that been US tho I probably wouldn't have made anything. Because the call options drop in IV as the market goes in their favor.

This might be good and well if you hold till expiry, not if you want to close out the trade early tho.

Now this might be offset by the puts rising in value as the market goes in their favor. However it kinda defeats the general idea of the straddle and that is to make a profit in either direction. If your going to aim for profit in the underlying dropping mbey there are some other strategies to look into.

Just my thoughts but I'm a buyer only, and I seriously don't understand how sellers of calls aren't driving around in ferraris! I mean I watch calls on the ES barely moving as the market goes up and then as the market goes down suddenly they drop in value :).

Just my opinion.
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Your thoughts are exactly why I seldom play regular straddles.

As a long only player, iv is a nightmare, no matter whether call or put. I been experimenting with delta neutral long synthetics (2:1), and if the stock goes up, the put iv naturally starts to decline. However the stock is climbing $1 for $1, while the puts are falling at a lot slower rate. And that opens the door for adjustments.

If the puts kick in, the iv will not collapse, and if it does (ER), it's only for a very short time. Start small to protect the investment, in case the stock goes sideways (nowhere), just bail and eat tiny money, and if the movement does happens, start making adjustments to lock in profit (remain delta neutral)
The caveat to the whole thing is, serious movement with liquid stocks is required, IMHO.
 
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CBC said:
My issue with buying straddles in the US is the IV drop. As the market rises IV drops. Like trying to swim up a waterfall IMO.
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Well, nothing prevents your from holding extra delta against it. That's what market makers do - you don't just blindly use BS delta but rather decide what delta to hedge on based on the skew and realized vol beta vs your vega and volga. While very theoretical-sounding greeks, they can have a very large impact.

PS. skew delta is one of the reasons why i'd not trust delta from any retail broker, as I have mentioned before.
 
sle said:
Well, nothing prevents your from holding extra delta against it. That's what market makers do - you don't just blindly use BS delta but rather decide what delta to hedge on based on the skew and realized vol beta vs your vega and volga. While very theoretical-sounding greeks, they can have a very large impact.

PS. skew delta is one of the reasons why i'd not trust delta from any retail broker, as I have mentioned before.
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Hi Sle,

Do you mean holding more calls open to even things out?
 
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