Hey all,

Good timing for me - after trading for aprox 3 years I'm finally seriously beginning to study straddles and will soon be backtesting scans, entry/exit rules, timing, etc. In the past I had no interest in straddles, but my mind is now open. Perhaps recently having my long legs IV crushed on otherwise well forcasted OTM calendars opened my mind???

So now that I qualified myself as NOT being a straddle expert (at least not yet) I think I have some guidelines that will reduce the frustration. Tradditional Straddles are directional plays with IV rush as an added booster (they can be used to strictly scalp IV also). Neither produces huge returns, but they are also short-term plays and can create nice little income streams.

The main criteria (straight forward and very well thought out textbook Optionetics/Tom G guidelines): Best to use three together as tedious as it might be to find candidates that pass all tests : 1) a consolidation pattern, 2)very low relative IV levels - in the lowest 1/5 of the past year (this is harder than it seems), 3) earnings (or another catalyst I suppose). Choose expirations that leave you 30 days left after the IV rush and hopefully the directional move is made. My added rule is to choose stocks that have historically had big IV jumps before the earnings announcement. From my observations thus far, IV seems to increase at different time intervals before earnings. For egs this fall, DNA's IV started to rise about 17 days before earnings, but AA's only 8. In my opinion it doesn't pay to get in much before you expect IV to rise because you are paying for extra time you don't need for the play and reduces the velocity of your $. These rules will no doubt disqualify many potential straddle plays, but I bet they keep you out of some losers!

Exit rules: Again in my humble opinion Optionetics guidelines serve us well. Whichever happens first: around the earnings time, at 30 days til expiration (remember to always watch the time decay on net long positions)or hopefully at a 50% profit.

Hope this helps. Feel free to contact me in a month when I have some serious backtesting practice behind me.

Good luck,
Adam

Hi SC,

First, search around Adam Brook's board for straddles/ strangles information. There are a few stocks which are considered having higher probability of winning and some of the Optionetics students are collaborating right now to come up with a better list of 'gappers'. So, that should be one of your sources of information.

You are correct in that part of the winning formula for this strategy is to manage the IV well. You don't really want to buy super-expensive options (i.e. options whose premiums are ridculously inflated) because even if you are correct in that the stock really moves, you may still end up with a losing trade due to IV crush. Manging IV is very important in straddles/strangles strategy.

The difference between straddle and strangle is only in relation to the choice of the strikes. If you purchase an ATM Put and an ATM Call (i.e. same strike same month), it is called straddles. If you purchase an OTM Put and an OTM Call (i.e. different strikes same month), it is called strangles.

If you have Platinum, you can backtest this strategy to see what stocks are considered good candidates. Again, visit Adam's board and read whatever you can therein.

Good trading!
Jack:)

Dear fellow investors,

After attending a Stock / options course, I have been trading options for over a year now. I was introduced to The Straddle strategy as ‘make money what ever direction market goes’. We were also taught to carefully select the right type of options using the Greeks. However my success has been mixed – On many occasions I would place a straddle before earnings announcement and I would make money on one side, but losing leg would eventually expire worthless, so my overall profit would be very little or none at all. (e.g. I traded CSCO recently and this happened). I expected straddles are good when the move is extremely dramatic (e.g. DELL recent move )or maybe I should consider becoming more directional in my trades?

Also was exactly is the difference between a straddle and strangle and how can it be applied towards earning announcement?

Any advice, thoughts and experience would be much appreciated.

thanks
SC