Option Strategies

Straddle

Introduction

Long Straddle is an Options trading strategy that consists of buying an ATM call and an ATM put, where both contracts have the same underlying asset, strike price, and expiration date. This strategy aims to profit from volatile movements in the underlying stock, either positive or negative.

Implementation

Follow these steps to implement the long straddle strategy:

  1. In the Initialize method, set the start date, end date, cash, and Option universe.
  2. private Symbol _symbol;
    
    public override void Initialize()
    {
        SetStartDate(2017, 4, 1);
        SetEndDate(2017, 6, 30);
        SetCash(100000);
    
        var option = AddOption("GOOG", Resolution.Minute);
        _symbol = option.Symbol;
        option.SetFilter(-1, 1, TimeSpan.FromDays(30), TimeSpan.FromDays(60));
    }
    def Initialize(self) -> None:
        self.SetStartDate(2017, 4, 1)
        self.SetEndDate(2017, 6, 30)
        self.SetCash(100000)
        
        option = self.AddOption("GOOG", Resolution.Minute)
        self.symbol = option.Symbol
        option.SetFilter(-1, 1, timedelta(30), timedelta(60))
  3. In the OnData method, select the expiration date and strike price of the contracts in the strategy legs.
  4. public override void OnData(Slice slice)
    {
        if (Portfolio.Invested) return;
    
        // Get the OptionChain
        var chain = slice.OptionChains.get(_symbol, null);
        if (chain == null || chain.Count() == 0) return;
    
        // Select an expiration date
        var expiry = chain.OrderBy(contract => contract.Expiry).Last().Expiry;
    
        // Select the ATM strike price
        var strike = chain.Where(contract => contract.Expiry == expiry)
                          .Select(contract => contract.Strike)
                          .OrderBy(strike => Math.Abs(strike - chain.Underlying.Price))
                          .First();
    def OnData(self, slice: Slice) -> None:
        if self.Portfolio.Invested: return
    
        # Get the OptionChain
        chain = slice.OptionChains.get(self.symbol, None)
        if not chain: return
    
        # Select an expiration date
        expiry = sorted(chain, key=lambda contract: contract.Expiry, reverse=True)[0].Expiry
    
        # Select the ATM strike price
        strikes = [contract.Strike for contract in chain if contract.Expiry == expiry]
        strike = sorted(strikes, key=lambda strike: abs(strike - chain.Underlying.Price))[0]
  5. In the OnData method, call the OptionStrategies.Straddle method and then submit the order.
  6. var optionStrategy = OptionStrategies.Straddle(_symbol, strike, expiry);
    Buy(optionStrategy, 1);
    option_strategy = OptionStrategies.Straddle(self.symbol, strike, expiry)
    self.Buy(option_strategy, 1)

Strategy Payoff

The payoff of the strategy is

$$ \begin{array}{rcll} C^{ATM}_T & = & (S_T - K^{C})^{+}\\ P^{ATM}_T & = & (K^{P} - S_T)^{+}\\ P_T & = & (C^{ATM}_T + P^{ATM}_T - C^{ATM}_0 - P^{ATM}_0)\times m - fee \end{array} $$ $$ \begin{array}{rcll} \textrm{where} & C^{ATM}_T & = & \textrm{ATM call value at time T}\\ & P^{ATM}_T & = & \textrm{ATM put value at time T}\\ & S_T & = & \textrm{Underlying asset price at time T}\\ & K^{C} & = & \textrm{ATM call strike price}\\ & K^{P} & = & \textrm{ATM put strike price}\\ & P_T & = & \textrm{Payout total at time T}\\ & C^{ATM}_0 & = & \textrm{ATM call value at position opening (debit paid)}\\ & P^{ATM}_0 & = & \textrm{ATM put value at position opening (debit paid)}\\ & m & = & \textrm{Contract multiplier}\\ & T & = & \textrm{Time of expiration} \end{array} $$

The following chart shows the payoff at expiration:

The maximum profit is unlimited if the underlying price rises to infinity at expiration.

The maximum loss is the net debit paid, $C^{ATM}_0 + P^{ATM}_0$. It occurs when the underlying price is the same at expiration as it was when you opened the trade. In this case, both Options expire worthless.

Example

The following table shows the price details of the assets in the algorithm at Option expiration (2017-05-20):

AssetPrice ($)Strike ($)
Call22.30835.00
Put23.90835.00
Underlying Equity at expiration934.01-

Therefore, the payoff is

$$ \begin{array}{rcll} C^{ATM}_T & = & (S_T - K^{C})^{+}\\ & = & (934.01-835.00)^{+}\\ & = & 98.99\\ P^{ATM}_T & = & (K^{P} - S_T)^{+}\\ & = & (835.00-934.01)^{+}\\ & = & 0\\ P_T & = & (C^{ATM}_T + P^{ATM}_T - C^{ATM}_0 - P^{ATM}_0)\times m - fee\\ & = & (98.99+0-22.3-23.9)\times100-1.00\times2\\ & = & 5277 \end{array} $$

So, the strategy gains $5,277.

The following algorithm implements a long straddle Option strategy:

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