A long straddle is an advanced options strategy used when a trader is seeking to profit from a big move in either direction and / or an increase in implied volatility.
To execute the strategy, a trader would buy a call and a put with the following conditions:
- Both options must use the same underlying stock
- Both options must have the same expiration
- Both options must have the same strike price
Since it involves having to buy both a call and a put, the trader must pay two premiums up-front, which also happens to be the maximum possible loss.
The potential profit is theoretically unlimited, although the trade will lose money each day through time decay if a big move does not occur.
The position means you will start with a net debit and only profit when the underlying stock rises above the upper break-even point or falls below the lower break-even point.
Profits can be made with a smaller price move if the move happens early in the trade.
Let’s take a look at Barchart’s Long Straddle Screener for February 15th. I have added a filer for Market Cap above 40b to remove small capitalization stocks.
The screener shows some interesting long straddle trades on popular stocks such as KO, INTC, MO, BMY, KHC, SLB, AAPL, MU and BAC. Let’s walk through a couple of examples.
KO Long Straddle Example
Let’s take a look at the first line item – a long straddle on KO.
Using the March 17th expiry, the trade would involve buying the 60 strike call and the 60 strike put. The premium paid for the trade would be $244 which is also the maximum loss. The maximum profit is theoretically unlimited. The lower breakeven price is 57.56 and the upper breakeven price is 62.44.Â
The premium paid is equal to 4.09% and the probability of success is estimated at 44.6%.
The Barchart Technical Opinion rating is a 56% Sell with an average short term outlook on maintaining the current direction.
Long term indicators fully support a continuation of the trend.
Implied volatility is currently 17.40% compared to a twelve-month low of 15.06% and a high of 28.93%.
Intel Long Straddle Example
Let’s take a look at the second line item, a long straddle on Intel.
Also using the March 17th expiry, the trade would involve buying the 29 strike call and the 29 strike put. The premium paid for the trade would be $228 which is also the maximum loss. The maximum profit is theoretically unlimited. The lower breakeven price is 26.72 and the upper breakeven price is 31.28.Â
The premium paid is equal to 7.96% and the probability of success is estimated at 44.3%.
The Barchart Technical Opinion rating is an 8% Sell with a Weakest short term outlook on maintaining the current direction.
Implied volatility is currently 34.29% compared to a twelve-month low of 26.68% and a high of 58.91%.
Altria Long Straddle Example
Let’s take a look at one final straddle, the third line item – a long straddle on MO.
Using the March 17th expiry, the trade would involve buying the 47.50 strike call and the 47.50 strike put. The premium paid for the trade would be $202 which is also the maximum loss. The maximum profit is theoretically unlimited. The lower breakeven price is 45.48 and the upper breakeven price is 49.52.Â
The premium received is equal to 4.26% and the probability of success is estimated at 44.3%.
The Barchart Technical Opinion rating is a 56% Buy with an Average short term outlook on maintaining the current direction.
Implied volatility is currently 17.00% compared to a twelve-month low of 17.00% and a high of 80.94%.
Mitigating Risk
Long straddles can lose money fairly quickly if the stock stay flat, and / or if implied volatility drops.
Position sizing is important so that a large loss does not cause more than a 1-2% loss in total portfolio value. Another good rule of thumb is a 20-30% stop loss.
Please remember that options are risky, and investors can lose 100% of their investment. This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
On the date of publication, Gavin McMaster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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