The STRADDLE

What the Hell is a Straddle?, my wife asked. "Its not a Strangle", I said. And my wife looked kind of weirdly into my eyes. "What do you want to do??"

I said, a Strangle needs two hands or strikes. "WHAAAAT??"

A Straddle only needs to legs to stand on. Her eyes were questioning my integrity. WHAT?

Yes, a Strangle needs two hands /Strike Prices. A Straddle only ONE. Like you standing with your legs straddling a little creek.

The Straddle is an OPTION SPREAD TRADE. You make money on either side of the creek but not in the creek. So the underlaying has to move by a certain amount to either side. This is one way to make money in any market. You protect your underbelly and gain if the market moves up or down. But it has to move with a certain speed (against Theta, Time Decay), and the creek's width (Premium Costs of the other leg and Commissions) and before a certain date (the expiration date)!

The idea of the straddle is that as the stock moves up in price, the long call becomes more valuable. Although the long put will lose value at the same time, it won't lose value as quickly as the call gains value. In addition, there is a lower limit as to just how much value the put can lose -- it can only go to zero. Thus, as the stock rises in price, the net effect is that the straddle gains in value.

The major problem with a straddle is that it consists of two options: a put and a call. As we're purchasing both options at the money, the entire value of the two premiums is Time Value. As Time Value is not "real" in that it has no inherent value and it decreases to zero as the option approaches expiration, we have the crux of the problem: The stock must move, and move soon, to recover the money lost by the erosion of time in the trade.

There are two ways the trade will be profitable. First, obviously, the stock's significant move would increase the value of one option while simultaneously decreasing the value of the other option, albeit at a slower rate. Second, both options could increase in value. The only way that can happen is to have the volatility of the options increase. All other variables in the Black-Scholes Option Pricing Model will affect puts and calls in opposite directions.

If the volatility of the option increases, then the option premium will increase, and the possibility of the stock moving will also increase (the basic concept of what volatility is measuring). Thus, if you can find a stock with relatively low volatility, which is increasing, the value of the straddle will be increasing and the stock will be likely to move either up or down -- a double chance for profit.

To be successful in trading straddles, we need to find a stock whose volatility is low but is about to increase as the stock begins to move. This may sound like real guessing at first, but in reality, it is not too hard to discover. The primary, most reliable reason for an increase in volatility and for the stock price to move is news. News can be anything from court decisions to new product discoveries to accounting "irregularities" to earnings announcements.

Of the various news possibilities, earnings reports are the easiest to predict and the most common. Every quarter, each publicly traded company is required by the

Securities and Exchange Commission

to report earnings, meaning there are four chances for the stock to move unpredictably each year. Further, each announcement will tend to be made at about the same point in each quarter.

Read the basics at https://www.thestreet.com

The Straddle can be a longer term trade. You have to give it time to evolve. Here was the setup this morning.

I usually do not hold options until expiration or within 2 weeks thereof. If the Option does not move at all, which is very unlikely, then the trade will lose all the money. If the stock moves past commission fees and about 6% either direction we start making money. 

These trades are great if you dont know the direction of the market and if you dont want to star at the screen all day long and watching candles. This trade goes either way as long as the market MOVES!

Now at the end of the day, Markets closing in one hour. Day done.

Here 15-Minutes charts of MRNA