Stocks & Commodities V. 26:3 (24-32) Buying Straddles by Jay Kaeppel

Buying Straddles by Jay Kaeppel

In this, the third article of the series, the strategy of buying a straddle is discussed, which gives option traders an opportunity not available to others.

AS discussed in the first article in this series, there are several key factors to consider in determining the best option trading strategy to use at any given point for a given security. Likewise, these criteria can be used to zero in on the specific best option or options to trade in executing a particular strategy. Selecting the proper strategy involves knowing what to look for in terms of the following variables:

■ Probability

■ Volatility

■ Time left until option expiration

■ The “skew” of implied volatility across strike prices and/or expiration months

■ Timing of market price movement.

The PROVEST option trading method criteria were developed to identify specific criteria in each of these key areas. The primary factors and key considerations are summarized in Figure 1.

In this installment we will look at a specific trading strategy — buying a long straddle — and how to use the PROVEST criteria to identify trading opportunities.