13
Jun
11

Straddle : difficult to make money

Just read an article on buying straddles into earning season http://www.theoptionsguide.com/buying-straddles-into-earnings.aspx. Somehow I am not completely sure if, one can make money by buying straddles.

Straddle is a simple option strategy where, one buy call and put at same strike price expecting a big  movement in either direction but not sure which way. Problem here is that, both call and put are At the Money (ATM) options, hence have high premium. It takes a lot of movement in either direction to recover premium cost and make money. For e.g. , if one knew of coming SBI Q4 2011 disaster, straddle would have made money. Otherwise, in most of the cases one loses money on time decay. Straddle can be useful in case, stock has run up too much and slight disappointment in terms of result will lead to big down-move. In case, the stock has been under performing till results, slight improvement can lead to a big up-move. In both the cases, up-move and down-move has to be more than 5-6% to be profitable. In my previous post https://writingoptions.wordpress.com/2011/06/11/why-did-i-trust-this-congress-government/ I had mentioned about buying strangle to benefit from increased volatility in Cairn India. Earlier, I had given a thought to buying a straddle in Cairn India, but decided against it after looking at 340 Call and 340 put premium (Rs 11 each). Large movement  of Rs. 22 was required on either side to become profitable, which is approximately 6% of the 340 strike price.

Pay-off diagram for Cairn 340 Straddle:

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1 Response to “Straddle : difficult to make money”



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