Keene on the Market: Trade to Win Using Unusual Options Activity, Volatility, and Earnings

CHAPTER 15

More Complex Options Strategies

■ Long Straddles and Strangles

Straddles and strangles are considered nondirectional strategies, or complex options strategies that can make profits whether the stock moves up or down. It is also important to understand that these strategies have near-zero deltas. These strategies are favorites in my arsenal because if you play them from the long side with the right catalyst, they have limited risk and unlimited profit potential.

Long Straddle

Strategy	Nondirectional, but a huge move in either direction is needed or an increase of implied volatility.
Outlook	I am expecting either a large bullish or bearish move or an increase of implied volatility.
Trade	Buy calls and puts of the same strike with the same expiration.
Advantages	I can place a bet that the stock will move, but if I am unsure about the direction of the move, this strategy will make money in movement in either direction. This strategy is commonly used with a catalyst such as earnings or a drug announcement.
Disadvantages	If the stock doesn't move, this position will lose money due to time decay. Also, if implied volatility moves lower, then this spread will lose money.
Maximum risk	The amount I paid for the straddle.
Maximum reward	In theory, the calls I am long have unlimited reward. To the downside, the stocks can only go to zero, so the downside movement is capped.
Breakeven	Upper: Straddle strike price + Price of straddle paid. Lower: Straddle strike ...