Straddle. Myth Busting! Think like a Pro!

2023年8月7日

Let's first look at a few images from our forecast database from the prior time period.




Take note of the dates on each of the straddles in the previous cases. They were surfaced well before the market actions that pushed stock prices to the specified levels.

Further, I'll include the answers about the nature of the Straddle option strategy, it's goal, benefits and drawbacks from ChatGPT's and Google's search results before we moving on.

Question: "Write what is the point of creating and applying Straddle option strategy?"

Answer: "The point of creating and applying a Straddle option strategy is to take advantage of potential price volatility in an underlying asset. A Straddle involves buying both a call option and a put option with the same strike price and expiration date.

This strategy is typically used when an investor expects a significant price movement in the underlying asset but is uncertain about the direction of the movement. By purchasing both a call and a put option, the investor has the potential to profit regardless of whether the price of the underlying asset goes up or down.

If the price moves significantly in either direction, the investor can exercise the corresponding option and profit from the price difference. The potential for profit is higher if the price movement is larger.

It allows investors to benefit from large price swings without having to predict the direction of the movement.

In summary, the point of creating and applying a Straddle option strategy is to capitalize on potential price volatility in an underlying asset, regardless of the direction of the price movement. It can be a useful strategy in certain market conditions but comes with its own costs and risks."

And another one question: "Descride Straddle strategy way that is using "smart money" and professional traders when the price reach out break-points?"

Answer: "Straddle" strategy is a popular technique among various market participants, including "smart money" such as hedge funds, and professional traders. The strategy involves buying a call option and a put option on the same underlying asset, with the same strike price and expiration date. This strategy is primarily used when a trader anticipates a high level of volatility in the asset but is unsure of the direction of the price movement.

When it comes to the use of straddles around break-even points or 'break-points', the straddle trader sees an opportunity when the price of the underlying reaches these levels. Here is how they might apply the strategy:

Establish the Straddle: As the underlying asset's price nears the break-even point, the trader, expecting a substantial price move, would establish a straddle by purchasing a call and put option at the same strike price (which is often close to the current price of the asset) and with the same expiry date.

Profiting from Volatility: The main goal of the straddle strategy is to profit from expected volatility. If the underlying's price moves significantly up or down, crossing the break-even points, one of the options will increase in value faster than the other one will lose, resulting in an overall profit.

Managing the Position: Depending on how the price of the underlying asset moves, the trader might decide to sell one of the options before expiry to capture its value while letting the other continue to its expiry, hoping for a continued significant move in that direction. Alternatively, if the expected volatility does not materialize, the trader could decide to exit the position entirely to cut losses.

Adjusting for Further Price Movements: Experienced traders may also adjust the straddle strategy as the price of the underlying asset and its volatility changes. This can involve 'straddle hopping' (establishing new straddles at different strike prices as the asset price moves) or 'gamma scalping' (adjusting the position to stay delta-neutral)."


If we simplify and compress everything above, it comes out that the Straddle technique is utilized when there is no confidence in the future market movement and allows trader make profit by raising volatility (I am not going into specifics for now) that is driving the stock beyond the breakeven levels.

Ok. This information is provided by quite reputable data sources.........

But, let's briefly return to the beginning of the article and take another look at the examples how this option strategy's use in real markets by real participants. Look at the screenshots for a while, and then think of what you observe. If there appears a discrepancy between what you observe and the information gathered from Google and ChatGPT, then your feelings are correct.

In the cases above, it turns out that Someone invested millions of dollars in Straddles based only on the hope of increasing volatility and a substantial fluctuation in the price of the underlying asset? Seriously? Are there no backup plans?

Of course, no. Professional market participants cannot act without a plan. Big and Huge Straddles are generated in the great majority of situations not at random, but by superimposing break-even points with the  graphical and VSA analyses results are reflecting the behavior of less informed market participants.

To go down "the rabbit hole," the purpose of a synthetic option position must be defined and revealed. Let us take a break to allow for greater absorption of the knowledge obtained.

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