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.
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Editors’ Picks
EUR/USD hits two-day highs near 1.1820
EUR/USD picks up pace and reaches two-day tops around 1.1820 at the end of the week. The pair’s move higher comes on the back of renewed weakness in the US Dollar amid growing talk that the Fed could deliver an interest rate cut as early as March. On the docket, the flash US Consumer Sentiment improves to 57.3 in February.
GBP/USD reclaims 1.3600 and above
GBP/USD reverses two straight days of losses, surpassing the key 1.3600 yardstick on Friday. Cable’s rebound comes as the Greenback slips away from two-week highs in response to some profit-taking mood and speculation of Fed rate cuts. In addition, hawkish comments from the BoE’s Pill are also collaborating with the quid’s improvement.
USD/JPY drops back below 157.00, as focus shifts to Japan snap election
USD/JPY is back in the red below 157.00 in the Asian session on Friday. The Japanese Yen recovers ground against the US Dollar amid some profit-taking ahead of Japan's snap general election on Sunday. The preliminary reading of the Michigan Consumer Sentiment Index report for February will be released later on Friday.
Editors’ Picks
EUR/USD: US Dollar to remain pressured until uncertainty fog dissipates Premium
The EUR/USD pair lost additional ground in the first week of February, settling at around 1.1820. The reversal lost momentum after the pair peaked at 1.2082 in January, its highest since mid-2021.
Gold: Volatility persists in commodity space Premium
After losing more than 8% to end the previous week, Gold (XAU/USD) remained under heavy selling pressure on Monday and dropped toward $4,400. Although XAU/USD staged a decisive rebound afterward, it failed to stabilize above $5,000.
GBP/USD: Pound Sterling tests key support ahead of a big week Premium
The Pound Sterling (GBP) changed course against the US Dollar (USD), with GBP/USD giving up nearly 200 pips in a dramatic correction.
Bitcoin: The worst may be behind us
Bitcoin (BTC) price recovers slightly, trading at $65,000 at the time of writing on Friday, after reaching a low of $60,000 during the early Asian trading session. The Crypto King remained under pressure so far this week, posting three consecutive weeks of losses exceeding 30%.
Three scenarios for Japanese Yen ahead of snap election Premium
The latest polls point to a dominant win for the ruling bloc at the upcoming Japanese snap election. The larger Sanae Takaichi’s mandate, the more investors fear faster implementation of tax cuts and spending plans.
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