Buying Straddles with Weekly Options
For the past 7 days, SPY had fluctuated more than $1.00 every day. One of the portfolios that we carry out at Terry’s Tips involves placing calendar spreads near the close on Thursday (buying options with 8 days of remaining life and selling options that will expire the next day). The risk profile graph for these spreads shows that a profit will be made if SPY fluctuates by less than a dollar in either direction on Friday (which it has done historically most of the time).
However, with 7 consecutive days of greater-than-$1.00 fluctuations, it did not seem like a prudent bet to place calendar spreads on Thursday (especially since SPY tends to be more volatile on Fridays when the Weekly options expire than it is on the other days).
Instead of buying calendar spreads, we bought SPY 132 puts and calls which would expire on Friday, paying $97 for each pair (with commissions, $99.50 each). At the time, SPY was trading right at $132.
This is called buying a straddle. If at any point on Friday, SPY changed in value by more than $1.00 in either direction, we could sell those options at a profit. (At any price above $133, the calls could be sold for more than we paid for the straddle, and at any price below $131, the puts could be sold for more than we paid for the straddle.)
SPY managed to change $2.00, beating the $1.00 threshold for the 8th consecutive day. Subscribers who held their straddles until near the close were able to double their money on Friday (admittedly, most of us pulled the trigger earlier than that, but I did manage to keep a few spreads until the end in my personal account).
Straddle buyers like volatility as much as we don’t like it in our other portfolios. What they like best is a whip-saw market where the market moves sharply higher (and they sell their calls) and then down (when they unload their puts). There are many ways to profit with options. Buying straddles when option prices are low and volatility is high is one very good way to make extraordinary gains.
The downside to buying straddles is that if the market doesn’t fluctuate much, you could lose every penny of your investment. This makes it a much riskier investment than the other option strategies we recommend at Terry’s Tips. However, straddle-buying can be quite profitable if the current market patterns persist.