Building and breaking straddle to make profit

F&O
1

Hi,

I am a newbie to options trading. Recently, I read about straddle strategy and tried to execute it. However, after buying both call and put options at the same strike price and while waiting for the profit to accumulate, I got one idea.

Why not I sell the option [call/put] that is going up in profit separately?

What I want to do is like this:

STEP 1: after buying the straddle, if the market goes down and PUT option goes up in profit, why not I sell it separately to make some profit [in other words temporarily break the straddle].

STEP 2: After selling the PUT option, again re-buy it immediately [in other words, to rebuild the temporarily broken straddle].

STEP 3: Do the above steps continuously and rollover to the next month options when I feel the option expiry percentage has increased.

Now guys, I request you to kindly throw your expertise on the above idea and let me know whether I get profit or loss if I execute it.

Thanks in advance.

2

Mostly loss. First, you are buying options … and that implies you are racing against time with highest theta decay on both sides to get a big move. Understand the payoff graphs.

Secondly,

This is where your assumption is flawed. You see, a movement from 100 to 105 and next from 105-110 does not guarantee a movement from 110-115. It is like a toss of coin. Each event is independent and having heads 2 times in a row does not guarantee having heads a third time. But our mind thinks in that fashion that it is going great. Check more on “Hot Hand Fallacy.”

Lastly, what I have seen is it is much cleaner to simply cut a position rather than manage it individually. An extension to hot hand fallacy - when you were not right the first time, why do you think you will be right the next. Check why averaging / double down / legging a strategy is a bad idea.

Keywords in bold for you to explore more … Cheers!

3

Thanks Risk.Money for the quick reply.

However, I have one doubt.

What if I follow Supertrend indicator and based on the positive and negative supertrend phases, I sell and buy the PUT & CALL options when they are in GREEN without breaking the straddle arrangement?

Can I still attract loss in the above scenario?

Please let me know.

Thanks in advance.

4

These are two different ideas -

  1. LONG STRADDLE - When you expect a sizeable move in either direction but the direction is unknown. Typically, before results, court rulings, major events, interest rate sensitive stuff, budget. Position taken before the move. You want the stock to be TRENDING.
  2. SUPERTREND - Identifies the underlying trend. Position taken after the move with signal given and its a lagging indicator. Although, the name suggests TREND, it depends on the timeframe and it seems the way you are describing - you would like the stock to be in TRADING range in WHIPSAW movement.

I am not suggesting this will make profit or for that matter loss. Even the best strategies can make loss and vice versa. But these are the points where you might like to optimise.

Above all, thinking it through and clearly is most important. My 2 cents - Don’t Mix Ideas.