Trading a WTI oil long straddle

Until now, you have had lessons in Calls and Puts. When you combine trading a Call and a Put together, you are trading an options strategy.

An options strategy is when you execute more than one option at the same time; buying and selling Calls and Puts in different combinations to take advantage of market moves in many different ways.

This lesson will focus on a specific strategy, a Long Straddle.
The long straddle is commonly used over news announcements and major economic events to trade an increase in volatility.  WTI Oil is known for its market volatility (even without news announcements), thus you buy a Call and Put together in a strategy with the expectation that volatility will increase. 

To execute this strategy, you buy a Put and Call at the same time with the same strike, expiry, and amount.  This results in a profit if the market moves in either direction beyond the premium paid for both options; the Put option will bring a profit if the market falls and the Call option will bring a profit if the market rises.

WTI OIL Long Straddle example:

The above image is an at-the-money WTI OIL Long Straddle where both the Call and Put are set with strike rates equal to the underlying market (0%) at execution. The strike rates do not have to be at 0%, but they do have to be the same.

The chart below shows the strategies’ profit or loss at expiry over a range of market rates. The dotted grey line highlights when profit/loss equals zero (the break-even point). Anything above the grey line is a profit and anything below it is a loss. The letter 'A' indicates the strike rate. If the market moves far enough in either direction past the break-even points, the strategy is profitable. But if the market rate does not break-out in either direction, the strategy creates a loss. This ‘V’ shaped chart is a classic Long Straddle strategy.

Advantage:

• Your maximum loss is limited to the premium paid at open
• You will not get stopped-out
• You can profit from a move in either direction.

Disadvantages:

• It involves a higher premium cost compared with trading in one direction because you are buying two options
• As time passes and the options get closer to expiry, time value is against you since both legs are decaying

Below is an actual scenario chart and table from the ORE Web-platform, optionsReasy. It shows the payout from a long straddle in WTI Oil, you can see you will profit as long as the market moves in either direction:



The chart below shows the strategies present payout (before expiry). Notice how the payout is higher than the payout at expiry. When you buy an option, or multiple options, you ideally want the market to move sooner, so you can cash-in before expiry and not suffer time decay.