Adjusting Straddles and Strangles

Module 6.5 Adjusting Straddles and Strangles

Adjusting Straddles and Strangles This class is a production of Safe Option Strategies © and the content is protected by copyright. Any reproduction or redistribution of this or any Safe Option Strategies © presentation is strictly prohibited by law. The information presented in this class is for education purposes only. Safe Option Strategies © does not make any recommendation to buy or sell stocks or options. Trading stocks and options comes with risk and you are solely responsible for any losses you may incur as a result of trading.

Module 6.5 Adjusting Straddles and Strangles

Review of The Straddle/Strangle Debit Spread Buy to Open the Trade Long Call is Placed At or Just Out of the Money and Typically 90 Days or Longer to Expiration. Long Put is Placed at the Same Strike Price (Straddle) or at a Lower Strike Price (Strangle) in the Same Month of Expiration. There is Not a Primary and Secondary Option in This Trade Unless There is a Very Bullish or Very Bearish Expectation. Cost Basis or Net Debit of the Trade is the Debit of the Long Call Plus the Debit of the Long Put. Max Risk = Cost Basis Max Reward = Unlimited Minus the Cost Basis to the Bullish Side; The Long Put Strike Price Minus the Cost Basis to the Bearish Side. Good Target ROI is 20-30% Good Target Time in the Trade is Under 8 weeks. Less Time is Better Due to Time Decay.

Module 6.5 Adjusting Straddles and Strangles

Adjustment for Stagnant Trend    

 LC SP

LP

Open the Trade Expecting Strong Movement Stock price moves into a stagnant trend. We should pick a side. Sell to close the option we don’t pick. Add short option to the side we pick, at a earlier expiration date creating a calendar spread.

Module 6.5 Adjusting Straddles and Strangles

SP SP

LC

LP

Module 6.5 Adjusting Straddles and Strangles

Adjustment for Stagnant Trend     SC

LC

SP

LP

 

Open the Trade Expecting Strong Movement Stock price moves into a stagnant trend. We could keep both sides. Sell to open short calls and manage the call side as a calendar spread. Sell to open short puts and manage the put side as a calendar spread. Manage each side as a completely separate trade.

Module 6.5 Adjusting Straddles and Strangles

SC

LC

SP LP

Module 6.5 Adjusting Straddles and Strangles

Summary 1. When the stock in a straddle or strangle moves stagnant, we can: 1. Pick one side of the trade and add short options creating a calendar spread. 2. Sell to close the other side of the trade for as little loss a possible. 3. Keep both long options and short respective options against them creating calendar spreads for both sides of the trade. 4. Treat the put side of the trade and the call side of the trade as two completely different trades moving forward (each should now have its own defined exit strategy.

2. Exercise patience in straddle and strangle trades. Give the stock a chance to pick a direction. 3. Always keep track of our cost basis and how it changes as we roll the option.