Would you consider straddle options to be a very low risk way of investing?

Question

A straddle option is when you buy a put and a call options on the same stock. Sure, you can lose money if the stock price stays the same, but that is unlikely to happen.

Answer 1

The answer to your question depends on three key elements.  

1.  What is the volatility of your stock?

2.  How quickly can you liquidate the negative side of your straddle before the full move toward the positive side is complete?

3.  The full range of movement on the positive leg of the straddle.

Answer 2

Do the "butterfly" strategy and consider a portfolio of options which depends only on volatility

Answer 3

Sure.  It's a very strong method for trading, used by many successful investors, so long as the anticipated movement of the stock, bond, commodity or currency in question is enough to offset the costs of the options, loads, capital gains, etc.

It's like anything else.  Just do your due diligence, and you'll be fine most of the time.

Answer 4

Well, your theoretical max loss for the Long Straddle(the one you're referring to) is the premium you paid for both options. So, in using such a strategy your risk is entirely controlled by how much is your risk capital. I wouldn't say its a very low risk way of investing, but rather, it is controlled.

Of course, your main concern would be the relative premiums you have paid compared to the relative volatility of the underlying security.=]

There's of course also the short straddle that you can do if you think that the volatility of the underlying security is gonna be low.

Answer 5

I don't think it as a low risk way of investing. It has a very good amount of risk involved. It can be termed as one of the exiting way of investing your money

Answer 6

<<<Would you consider straddle options to be a very low risk way of investing?>>>

I'll answer with a quote from Natenberg's book "Option Volatility & Pricing" (page 187).

"While there is no substitute for experience, most traders quickly learn an important rule: straddles and strangles are the riskiest of all spreads. This is true whether one buys or sells these strategies. New traders sometimes assume the purchase of straddles and strangles is not especially risky because such strategies have limited risk. But it can be just as painful to lose money day after day when one buys a straddle or strangle and the market fails to move, as it is to lose the same amount of money all at once when one sells a straddle and the market makes a violent move. Of course, a trader who is right about volatility can reap large rewards from straddles and strangles. But an experienced trader know that such strategies offer the least margin for error, and he will usually prefer other strategies with more desirable risk characteristics."

In that quote the phrase "straddles and strangles are the riskiest of all spreads" is emphasized.

Since Sheldon Natenberg is one of the few acknowledged experts on options, I believe it would be foolish to ignore his advice.

Remember that if you hold your straddle until expiration you are guaranteed that either the puts or the calls will become worthless. That's a 100% loss on half of your investments.

<<<A straddle option is when you buy a put and a call options on the same stock.>>>

To be a straddle both the put and the call must also have the same strke price and expiry.

<<<Sure, you can lose money if the stock price stays the same, but that is unlikely to happen.>>>

You will also lose money if the stock price does move but not enough to exceed the premiums you paid, which is likely to happen.