I recently entered a Options Trading Simulator through my University just to learn a bit about how the Stock Market works. To be eligible to win certain cash prizes, everyone needed to follow some listed trading strategies, including straddling.
Having never traded on the Stock Market before I was completely unaware of what straddling actually was. And after actually taking my first crack at it I failed.. miserably. Lost the entire “fake money” investment. However, I learnt from this mistake and now know the benefit of the strategy.
What is A Straddle?
Straddling consists of two popular options called “Put” and “Call” options. When you straddle a stock, essentially at a “strike price”, which usually is the current price of the stock, you own a put and a call option. The put option allows you to sell the stock before the option expires at the strike price and the call option allows you to buy the stock before the option expires at the strike price.
When to Straddle?
The time to straddle a stock is when you expect the stock price to move rapidly in either direction but are unsure which direction.
Dependent on the beta (volatility) of the stock your strike price for your options will change. Meaning, if you straddle an extremely volatile stock already like oil companies, you will need it to move more than it normally does to actually profit from this strategy.
If the stock price stays within the two options or barely passes one of the strike prices you will generally have a losing position.
That is why you should generally be straddling, for example, when a company’s quarterly earnings are soon to come out or a merger/acquisition is announced. This, historically, is when stock prices move a lot.
Anyways, that’s what I’ve learnt about this trading strategy, hope it helps others out there.