Straddles

I am just now starting to learn how to trade short straddles so this page will change and evolve as I learn new things.  I want to get better at the management of these trades.

Short straddles are nice when IV is up – it makes the credits juicier.   I’m warming up to short straddles because they offer an alternative to selling ICs which I still only like to put on against indexes.  Many people like buying straddles for stocks they think will move fast and far or the sell them when they think Vega crush is about to occur.  But I like them for grabbing nice credits against slow moving stocks.  This only works when the VIX is high.  When vol. is low I tend to use Vertical spreads more.

Take for example MSFT.  This is a slow moving stock that is perpetually stuck between $19 and $25.  Normally I like to sell BLPS and BRCS when the stock gets close to support and resistance.   This works well but when VIX spikes up,  it makes all the options more expensive and the credits get bigger.  That’s when I like to put on a short straddle instead.  I can get about $1.30 credit for about $3.50 risk.  This isn’t much more risk than a vertical spread but I get the advantages of a bigger credit and the BEPs are further out.

Short Straddle Plan

  1. Look for slow moving stocks with vol at least 30%.   This may seem counter intuitive but it’s not hard to find them when the VIX is high.
  2. If there is a reasonable chance for a black swan event look to put on insurance by buying puts and calls just outside the short strikes.
  3. If I have no insurance against a SS and the price gaps up or down,  cover/sell the other side opposite the gap and look to buy insurance on the other end.  This will turn the trade into a vertical of some kind.
  4. Stop losses should be no more than -35%.  Shut things down if they get out of hand.  Don’t make things worse buying insurance which opens me up to more risk or holding out for reversals.
  5. NEVER, EVER be short naked calls.   There is no reason EVER to be short naked calls.  That much risk is not for me.
  6. Only allow naked short puts IF it doesn’t push the trade above the maximum risk allowed per trade.
  7. Allow the trade to stay on into expiration only if the price is close to the mid point.  Otherwise close down the trade within 2 days of expiration.
  8. Entire trade must be closed before any earnings announcements.

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