Volatility is dropping back down again, with the VIX Index closing at 13.84 on Friday. When volatility is low, options become cheaper, so today we’re taking a look at the Long Straddle Screener.
A long straddle is an advanced options strategy used when a trader is seeking to profit from a big move in either direction and / or an increase in implied volatility.
To execute the strategy, a trader would buy a call and a put with the following conditions:
- Both options must use the same underlying stock
- Both options must have the same expiration
- Both options must have the same strike price
Since it involves having to buy both a call and a put, the trader must pay two premiums up-front, which also happens to be the maximum possible loss.
The potential profit is theoretically unlimited, although the trade will lose money each day through time decay if a big move does not occur.
The position means you will start with a net debit and only profit when the underlying stock rises above the upper break-even point or falls below the lower break-even point.
Profits can be made with a smaller price move if the move happens early in the trade.
Let’s take a look at Barchart’s Long Straddle Screener for September 11th. I have added a filer for Market Cap above 40b and total call volume above 2,000.
The screener shows some interesting long straddle trades on popular stocks such as WMT, AAPL, RTX, PFE, TGT, AMD and META. Let’s walk through a couple of examples.
WMT Long Straddle Example
Let’s take a look at the second line item – a long straddle on WMT.
Using the October 10th expiry, the trade would involve buying the $165-strike call and the $165-strike put. The premium paid for the trade would be $275, which is also the maximum loss. The maximum profit is theoretically unlimited. The lower breakeven price is $159.18 and the upper breakeven price is $170.82.
The premium paid is equal to 3.55% of the stock price and the probability of success is estimated at 45.9%.
The Barchart Technical Opinion rating is a 100% Buy and ranks in the Top 1% of all short term signal directions.
Long term indicators fully support a continuation of the trend.
The market is in highly overbought territory. Beware of a trend reversal.
Implied volatility is currently 13.14% compared to a twelve-month low of 12.06% and a high of 31.94%.
PFE Long Straddle Example
Let’s take a look at the sixth line item – a long straddle on CSCO.
Using the December 15th expiry, the trade would involve buying the $35 strike call and the $35 strike put. The premium paid for the trade would be $348, which is also the maximum loss. The maximum profit is theoretically unlimited. The lower breakeven price is $31.52 and the upper breakeven price is $38.48.
The premium paid is equal to 10.16% of the stock price and the probability of success is estimated at 44.4%.
The Barchart Technical Opinion rating is a 100% Sell with a Strengthening short term outlook on maintaining the current direction.
Long term indicators fully support a continuation of the trend.
The market is in highly oversold territory. Beware of a trend reversal.
Implied volatility is currently 21.34% compared to a twelve-month low of 18.44% and a high of 35.97%.
TGT Long Straddle Example
Let’s take a look at one final straddle, the seventh line item – a long straddle on TGT.
Using the October 20th expiry, the trade would involve buying the $125 strike call and the $125 strike put. The premium paid for the trade would be $775, which is also the maximum loss. The maximum profit is theoretically unlimited. The lower breakeven price is $117.25 and the upper breakeven price is $132.75.
The premium paid is equal to 6.27% of the stock price and the probability of success is estimated at 44.0%.
The Barchart Technical Opinion rating is a 100% Sell with a Strengthening short term outlook on maintaining the current direction.
Long term indicators fully support a continuation of the trend.
Implied volatility is currently 23.00% compared to a twelve-month low of 22.62% and a high of 52.03%.
Mitigating Risk
Long straddles can lose money fairly quickly if the stock stay flat, and / or if implied volatility drops.
Position sizing is important so that a large loss does not cause more than a 1-2% loss in total portfolio value. Another good rule of thumb is a 20-30% stop loss.
Please remember that options are risky, and investors can lose 100% of their investment. This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
On the date of publication, Gavin McMaster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
