Can anyone explain in detail about long straddle strategy with real time example and in basic language
Long straddle strategy.: Buying out the money both call and put option.
for ex: lets say cmp at 500 rs, so you get you choose the OTM strike price, lets say 480PE and 520CE.
as the contract is trading with the premium value, you need to buy both premium.
be aware with the premium decay, as the contract expires.
** NOTE **
i) All OTM and ATM strikes prices are made to be ZERO by the expiry.
ii) All ITM strike price will have premium left and the premium left will be the difference between the strike price and the market closing price.
So here are the long straddle characteristic:
i) buy call and put both OTM strike price
ii) time decay- LOSS
iii) expected movement huge then the normal movement
iv) unlimited profit
v) limited loss
as these are some key points that too keep in note.
Ex: lets say the premium of 480 pe and 520 ce is 10rs as the contract is running in 1st week.
casei) Intraday: If the market moves with the expected movement then you can sqaure off the position and get to keep the profit.
caseii) Expiry: To make profit on expiry the market should close above 540rs because the investment is 20rs, as we have bought both Strikeprices (CE & PE). on expiry If market closes at 520rs the premium left will be 0 for CE and PE according to the note i) and if the market closes at say 540rs then the premium left is 20rs according to note ii).
for more details click on link Varsity.
Long straddle strategy should be used when there is more volatility.
For example if there is a big news, positive result will move the index by +100 points and negative results will move the index by -100 points.
In this scenario buying call option will result in huge loss when the result is negative.
Similarly, buying put option will result in huge loss when result is positive.
As we know there will be huge movement in any one direction but not sure which one, then we can buy equal amount of call and put options.
For example, today i was expecting good movement in negative direction of banknifty index. Banknifty index was near 24600. I purchased 1 lot of 24600 ce option at 156 and 1 lot of 24600 pe option at 160. Total purchase price is 156 *40 + 160 * 40.
At the end of day banknifty index was around 24850. Now the 24600 ce is trading at 314 rs and 24600 pe is trading at 24.5 rs
Profit would be around 1000 rs in above trade for 1 lot.
The problem in above trade is you get low profit for more than 250 points movement. At one stage I had a loss greater than 10000 rupees till around 2.30 pm. Because i purchased Banknifty options that expire tomorrow.
If it has more days to expire then my profit would be more. You should consider both expiry and points movement before implementing this strategy.
So if we implement long straddle at the start of the contract , chances of loosing money are less , since we have more time?
Your cost will be higher
As mentioned above, you can do it if you believe within this contract, for sure the index/stock will move a good bit, which can be on either side
But as you wait, and if there is no/little move, both Call and put premium start coming down, that’s the risk. You may be out due to stop loss before the actual move comes.
What about long straddle with OTM calls? Time is also there and premiums are not so worrisome.
Most of the time I’m fairly correct about market moves , it’s just that I don’t like stops and I’m okay paying premiums since they can’t be manipulated
Not only time. It depends upon
- Good one direction move
- Fair premium
For 13th june expiry, premium looks fair and there is 1 week time. Strategy cost of ATM banknifty options is around 420 points for 1 lot. So 1.5 percentage movement in one direction is needed to get break even.
If you are confident that banknifty moves more than 2 percent in any one direction, you will be in good profits. If it does not move, there will be loss due to premium erosion.
Any idea how to get delta values for various strikes… neither nse / mcx option chains display any of the Greeks