At-a-Glance

Key Takeaways with Craig

The Straddle, like the Strangle, is an options strategy that seeks to take advantage of situations during which the volatility that the options market is pricing is different than the actual (realized) volatility of the underlying instrument over the life of the option.  The strategy involves the simultaneous purchase or sale of a Call and Put at the same strike price, oftentimes executed using the at-the-money strike. Because of an element of options pricing called “Put-Call Parity”, and because a straddle consists of Calls and Puts at the same strike, the Delta value of a straddle is near 0.  This should make some intuitive sense, as the buyer of a speculative straddle position is somewhat indifferent to upside or downside price moves in the underlying instrument.  

The upcoming US Elections offer an opportunity to explore the impact that implied volatility has on the price of options using Straddles as our example.  

On 10/28/2024 at 12:55 PM Chicago Time, the Price of the December E-mini Nasdaq-100 futures was trading at 20,553.  The at-the-money (ATM) straddles expiring the day before and the day after the US Elections were trading as shown in fig. 1. 

As you can see, largely because the implied volatility of the options that expire after the election is trading approximately 4% higher than the options that expire prior to the election, the premium of the options that expire Wednesday is 170.25 points, or $8,512.50 greater than those on Monday.  If all else was equal, we’d expect the options that expire Wednesday to be worth slightly more than the Monday options due to the 2 extra days of time value, but much of this difference is driven by the difference in volatility.  For comparison’s sake, the straddle that expires the last Wednesday in November (on a week without an election) is only trading about 3 points greater than the straddle that expires that Monday.  

Remember, a buyer of a speculative Straddle position doesn’t care if the price of the underlying moves up or down because they are long both a Call and a Put; they are simply expressing a view that the underlying price will move more than the options market is pricing.  

Ignoring price and volatility moves between the time of execution and option expiration then, the buyer of the Straddle that expires on Monday in our example above, will realize a profit, at expiration, if the E-mini Nasdaq-100 is greater than 436 points UP OR DOWN, from the strike price of 20,550 (excluding fees and commissions).   The buyer of the straddle that expires after the election, will realize a profit (again, excluding fees and commissions) if the price of the E-mini Nasdaq-100 is greater than 606.25 points from the strike price at expiration.  The standard options P&L graph below shows the potential for greater loss (buying a straddle is a “risk defined’ trade in which the buyer can lose only up to the premium paid; the seller of the straddle, on the other hand, is exposed to unlimited losses) and more limited upside when purchasing options with higher implied volatility, as shown with the orange line.  

In other words, because of the market-moving potential of the US elections, options sellers demand significantly more premium to protect themselves from outsized price moves for the options that expire immediately after the election.  

Straddles are useful strategies to watch because of the “pure” volatility aspect that they represent.  Oftentimes, traders, as well as the financial press, will look to Straddles to determine how much price movement the options market is pricing into the underlying instrument before things like economic releases, earnings reports etc.  

Try the Straddle strategy on our Strategy Simulator


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