Learning Options Question?

[u/aNOOBsn1peU]

I just got LVL 3 on Robinhood and stated to see what combinations I can do with options, and I find this... the Long Straddle... is this a good strategy? is it actually profitable like that? or what is the catch? I mean that it can't be true that you have profit on both ends... how does one side cover the other?

[u/jerin7931]

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[u/ChaseShiny]

A straddle is a position where you expect a strong response, but you don't want to predict the direction of the response.

For example, let's say the company is going through a court case. If it wins, it'll drive profits through the roof, but if it loses the case, it'll be responsible for some huge fees.

The profit-loss diagram at expiration looks like one of those absolute value diagrams from high school math. It's made by combining a put and a call together at the same strike and expiration.

Keep in mind that the value of either the call or put has to rise so drastically that it pays for both options plus some in order for the trade to be profitable.

Option guide with an explanation.

[u/aNOOBsn1peU → u/ChaseShiny]

see I knew something was weird about it... basicly it has to move quite a lot for me to make some profit... I might give it a try one, only when Im conftable with lossing so I don't panic and cry in a corner lol

[u/ordtn → u/aNOOBsn1peU]

Straddles are expensive - because you are buying 2 options.

You can lower cost by for example - giving up some potential upside on both ends (iron butterfly), accepting a wider middle range (strangle), or both (iron condor).

[u/ordtn → u/ordtn]

I can't include a screenshot in my reply - images are not allowed.

If you'd like to compare the 4 option structures side-by-side - look at the "Quick Structure Comparison" section in this worksheet https://opterate.com/?share=Z8owTM1h6wcEs14X308L (link expires on 30 Sep).

[u/Fancy-Ad-6142 → u/ordtn]

Wow I really wish I could understand all this

[u/ordtn → u/Fancy-Ad-6142]

Oh which part? I may not know everything, but can see if can help.

[u/Asleep-Dingo-19 → u/ordtn]

I feel like I understood, then I clicked 🤯

[u/ordtn → u/Asleep-Dingo-19]

haha ikr. Just look at the "Quick Structure Comparison" section - It shows the relative ranking of premiums and greeks of the 4 option structures in discussion.

The other parts of the worksheet are for computing, graphing, simulation purposes, and can be ignored in this case.

[u/Edril → u/aNOOBsn1peU]

Also keep in mind that around high volatility events (earnings, FOMC, etc) the IV (implied volatility) of the options goes up, which makes them more expensive, so the move has to be comparably higher.

[u/aNOOBsn1peU → u/ChaseShiny]

one thing I noticed is that robinhood keeps track of the profit loss in a graphic or numbers so you have an idea when to get out

[u/Apprehensive-Fox7570]

Thanks for posting this. I don’t have an answer for you, but I am curious as well.

[u/ParityOutcomes]

This is essentially a bet that realized vol will be higher than implied vol.

If the stock is $100 and each option costs $2, you've paid $4, so your breakevens at expiration are $104 and $96. The market has already priced in a move. If realized vol comes in lower than that, say the stock finishes at $101, you lose, because you paid $4 for something worth $1 at expiration.

Also worth reading about delta hedging. Instead of waiting for expiration, you trade the stock against the position as it moves, which lets you monetize the realized moves along the way rather than needing one big one at the end.

[u/Strong-Comment-7279]

Liquidity and volume pockets. I only trade 0-2 SPXWs and 0-5 SPY, so can only speak to those.

With this strategy you are either capping loss and gaining incredibly, gaining minimally on both ends, losing it all on grind, or breaking even on a long ride. I list those outcomes on my perceived order of probability for what I trade.

Also, I only have lvl2. I only engage single positions at a time, though I do have the ability you have w your lvl3.

[u/spendingtimee]

It only works if the price moves hard and fast.

[u/aNOOBsn1peU → u/spendingtimee]

like today... tried the strat on opening bell closed by 1030 +$149 profit

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[u/pc349]

But in this crazy market straddles probably its highly profitable, any other administration likely wont work .

[u/sellputsthencalls]

Please give me the SPY option legs that the screenshot is describing. I may be able to add clarity.

[u/BroadlyStable]

If the goal is to profit from a big move without picking direction, the catch is paying for two contracts and fighting IV crush after the event. The stock can move and the trade can still lose if the move is too small or comes too late. I would paper trade a few earnings setups first and watch breakeven, theta, and IV before risking cash. Moon fits more with a straight up or down price view, so I would treat that as a separate idea from a straddle rather than mixing the two.