Options Trading

Straddle Charts: The most important part of stock selection for the straddle option is in selecting the equity using a technical trading approach from the candlestick charts. There are naturally many reasons why stocks and shares move sharply, resulting in significant movement in the options, and most occur when least expected. In the pharmaceutical industry this happens regularly, particularly if drugs are withdrawn from the market following adverse trials.

Company results can move prices dramatically as can the sudden resignation of a board member, or the rumour of a takeover or merger. As traders using the straddle we have to try to forecast a sudden and sharp price move in the future - we don't mind which way it goes, just so long as it goes! The best way to do this is to analyse the price chart for the particular stock and we are looking for one type of  pattern in particular as follows :

Options Trading: Straddle Prospects Charts - The Pennant / Flag/ Triangle

We are looking for only one thing in our chart analysis, and that is simply a series of candles which are showing consolidation of prices as shown on the left. Now whether you call this chart pattern a pennant a flag or a triangle, it is clearly telling us that the price movement on the daily chart is becoming smaller, day by day. The purple lines simply connect the highest prices and lowest prices, and form a cone. There must be a reason why this is happening? Is it because there is a major news announcement due in a few weeks time, are results expected soon that may not meet the market expectations, has the chairman resigned, are products about to be withdrawn from the market, have drug trials gone badly. There are many reasons for prices to consolidate in the above way, but they give us the perfect place to start in selecting our straddle prospects. Having identified our prospects from the charts, we then need to start searching for the possible reasons. Check company results, read press releases between the lines, study the news, do some digging on the company - anything that may confirm to you that there is some hidden reason for this lack of price movement. Having done your research, if you feel there is a chance that prices will break out suddenly in the next three months, then open your trade by buying the put and call options with a strike price which is at the money ( or as close as possible ).

Options Trading: Straddle Prospects Charts - Managing The Trade

Having placed our straddle trade, we then have to wait for the price of the stock to move, far and fast, and our options to follow! Let's assume that the news item has moved the market and the stock price has increased dramatically. The call option will now be in profit and the put option in loss. The advantage of the long straddle is that as the option holder you can sell off the profitable leg ( the call ) and hold onto the other ( the put ) in the hope that prices reverse and you have two bites at the profit cherry!! The difficult decision as always is where to take your profits!

The second scenario occurs when the news announcement is made and nothing happens to the stock price. Personally I would leave it for a day or so and then close both options to avoid a 100% loss on the trade. Many traders live in hope and find this hard to do, but in trading it is the best strategy as some of your trading capital is retained, allowing you to live to fight another day and find another long straddle!

I hope you have found this site on option trading and the straddle, useful and enjoyable, and as always I would be delighted to hear from you. I do receive many emails from around the world and am always delighted to reply and help if I can. Once again, many thanks for taking the time to visit the site and best of luck with your option trading - kind regards Anna

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