Straddle strategy in futures and options

Futures and options are derivatives, derivative securities, and because the strategy  based on the work with these tools, refer to complex and professional. I am more specialized in simple strategies, only briefly introduce the essence of derivatives trading, offering the readers of the portal themselves to fill the gaps left after reading the article.

  • Option — a contract under which a potential buyer (or seller) acquires the right (but not the obligation) to buy or sell the underlying asset (securities or goods) at a price predetermined in the contract, at a fixed (or during) the length of time. Options for sale — Put, for purchase — Call.

Definition is very similar to futures, the only difference is that futures is more standardized form of contract, and an option is an instrument of speculative transactions almost in a free form. There is also a difference in the nature of the treatment contract (the futures is guaranteed by the exchange), but the strategy is not relevant.

Straddle: the essence of the strategy in options trading

Straddle — the simultaneous purchase and sale of option with the same strike price, still called the rack. No matter in what direction will the trend move, the trader will receive a profit due to the difference in spread (in general, but everything is not so simple).

  • An example of a long straddle. The trader suggests a strong price movement (direction not known. The situation is typical of volatile markets that respond to fundamental news). The trader buys both options (execution price (strike price) — 100, the deadline is in a month). The Call option costed 4 rubles, Put –  3 rubles, the total cost is 7 rubles.

The figure below shows the distribution zone of profits and losses of the trader. As you can see, high volatility, once the price goes beyond the areas of loss, one of the options is closed, from the second the profit is pulled.

futures strategy

Example of short straddle the same, but on the contrary small volatility is taken into account, which is inherent in calm markets. The only difference is that there is not buying and selling both options. Area of profit and loss shown in the following figure.

straddle strategy

The above gradation is only a very simplified version of the strategy, I will pay attention to such strategies as “strangle”, “butterfly” etc. and yet a few words about the types of options that are important in the implementation of straddle:

  • ATM (at the money). Means the situation when the current tentative price equal to the exercise price. That is, if the contract states a strike price (to the end of the contract) $ 30 and the current price is the same. The option is at the money;
  • OTM (out of the money). The situation in which the exercise price is below the underlying quotes. For example, for a Call option is the value of $ 30 at an exercise price of 60 dollars. or $ 10 to Put. The option is not profitable, that is out of the money. In other words, the purchase of a Call option would mean that the trader would need to buy the underlying asset for 60 dollars (for a Put to sell for $ 10), i.e. at a loss;
  • ITM (in the money). For a Call option it is profitable, the price of the asset is $ 30 at an exercise price of $ 20 (profit will be $ 10), or to Put option — strike price of 80 dollars (for a profit of $ 50).

Most of the strategies use to minimize risk only the options “at the money”. The advantages of the strategy “straddle” include low threshold of entry into the market, limiting risk to only award options strategy is relatively straightforward (but still understandable is after practice). The disadvantages include the possibility of its application. As the strategy is highly profitable (minimal risk), not all brokers allow simultaneous buying and selling of a single option.

About the author