straddles... how do they make money?

TheBigShort said:
stock xyz = $100
straddle price $5
Stock goes up to 200.

Call = $100, Put = $0. You made 100-5 = $95. Very simple
There is more to this tho. You should start to learn about the greeks if you want to get into options trading.
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TheBigShort said:
??? They are a pure volatility play. The proper way to trade a strangle/strangle. Is to make a prediction on volatility and delta hedge until the profit/loss is realized. Also strangles are not more profitable than strangles. They both have there merits.
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  • The example you posted is purely a directional trade.
  • Again using your example a strangle would blow the straddle out of the water when it comes to profit.
 
OptionsOptionsOptions said:
  • The example you posted is purely a directional trade.
  • Again using your example a strangle would blow the straddle out of the water when it comes to profit.
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That would be a directional trade if there was no time value associated with it. With options you have to guess the move within a time frame.
Volatility = some move * some time factor. So once again straddles/strangles are a pure volatility play.

XYZ = 100.
I buy 100 straddle
I buy 50/150 strangle
Stock stays flat for 10 days then gaps to 149 right before expiration. Which one was more profitable??
 
TheBigShort said:
That would be a directional trade if there was no time value associated with it. With options you have to guess the move within a time frame.
Volatility = some move * some time factor. So once again straddles/strangles are a pure volatility play.

XYZ = 100.
I buy 100 straddle
I buy 50/150 strangle
Stock stays flat for 10 days then gaps to 149 right before expiration. Which one was more profitable??
More...


The Strangle is more profitable.
Using real quotes and common sense in selecting the strikes for the strangle and based on your 100 XYZ example and $5.00 debit for the straddle.


MSFT at $101.63
  • MSFT July13 2018 100.00 call ask $3.25
  • MSFT July13 2018 100.00 put ask $1.36
  • Straddle Total Debit $4.61
  • MSFT July13 2018 115.00 call ask $0.05
  • MSFT July13 2018 85.00 put ask $0.08
  • Strangle Total Debit $0.13
  • MSFT to $149.00 right before expiration.
  • Straddle: $49 ITM / $4.61 = 10X trade.
  • Strangle: $34 ITM / $0.13 = 261X trade.
 
OptionsOptionsOptions said:
The Strangle is more profitable.
Using real quotes and common sense in selecting the strikes for the strangle and based on your 100 XYZ example and $5.00 debit for the straddle.


MSFT at $101.63
  • MSFT July13 2018 100.00 call ask $3.25
  • MSFT July13 2018 100.00 put ask $1.36
  • Straddle Total Debit $4.61
  • MSFT July13 2018 115.00 call ask $0.05
  • MSFT July13 2018 85.00 put ask $0.08
  • Strangle Total Debit $0.13
  • MSFT to $149.00 right before expiration.
  • Straddle: $49 ITM / $4.61 = 10X trade.
  • Strangle: $34 ITM / $0.13 = 261X trade.
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Option x3. I must be very stupid. Can you explain the reason for the strangle to be more profitable than a straddle.

I will tell you the reason why they BOTH have the same expected value. If they are both priced at the same implied vol which single stocks usually have (less skew compared to index) then they are both priced for the EXACT same move.

So it does not matter if you buy a strangle or a straddle. Strangles have much more leverage than a strangle. Leverage DOES NOT equal more profitable.
 
buy options when vol is low, sell when it's high. The trick is knowing WHEN vol is low, or high. Don't trade naked,go for modest returns. Don't lose money
 
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