Buy or Sell Straddle/Strangle

Script name: Straddle / strangle buy or sell indicator

straddle at expiration
strangle at expiration
straddle indicator
strangle indicator

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Options involve risk and are not suitable for all investors. For information on the uses and risks of options, you can obtain a copy of the Options Corporation risk disclosure documented titled Characteristics and Risks of Standardized Options.

 

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Copyright © 2020, by CHOBOTARU BROTHERS

 

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Input parameters explanation
straddle indicator input

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1.      Choose Buying or Selling the strategy.

2.      The debit paid or credit received for the strategy (1 unit).

a.       Minimum value: zero; only positive numbers.

b.       If debit for 1 strategy unit is $1 insert 1.

c.       If credit for 1 strategy unit is $0.5 insert 0.5.

d.      1 unit explained – enter the net debit/credit of 1 call and 1 put combined only.

3.      The stock price when bought/sold the options.

a.       Minimum value: zero; only positive numbers.

4.      Upper Strike price of the strategy.

a.       Minimum value: zero; only positive numbers.

b.      A private case of strangle is a straddle, meaning the upper and the lower strikes are the same.

5.      Lower Strike price of the strategy.

a.       Minimum value: zero; only positive numbers.

b.      A private case of strangle is a straddle, meaning the upper and the lower strikes are the same.

6.      Interest rate: annualized continuously compounded risk-free rate of return over the life of the options.

a.       Minimum value: zero; only positive numbers.

b.      U.S. Department of the treasury – find it here

7.      Time to expiration of the options, specify the number of days.

a.       Minimum value: 1; only positive numbers.

b.      Only integer numbers. No half days allowed.

c.       The number of days to expiration has to be matched with the date entered below!  The date and the number of days should not be changed by the user, as time passes.

8.      Annualized asset price volatility, specific as a positive decimal number. IV 10% => input 0.1

a.       Minimum value: zero; only positive numbers.

b.      Find it in the “options chain”, in your brokerage platform.

9.      A calendar day of the month that the option bought/sold.

a.       Input 1 to 31 depending on the calendar date.

10.  Calendar month the option bought/sold.

a.       Input 1 to 12 depending on the calendar date.

11.  Calendar year the option bought/sold.

a.       Minimum value: 1970.

b.      The year format is 4 digits number.

12.  Profit/loss line defined by the user.

a.       Minimum value: -0.95

i.      If the strategy was bought, -0.95 means, 95% of the strategy value is lost (unrealized).

ii.      If the strategy was sold, -0.95 means, 95% of the credit received (unrealized), 95% of the strategy value is lost.

b.      Maximum value: 3

i.      If the strategy was bought, 3 means, the risk to reward is 3.

Example: paid $100 for the strategy, at this line unrealized profit will be $300.

ii.      If the strategy was sold, 3 means, the risk to reward is -3.

Example: the credit received $100 for the strategy, at this line unrealized loss will be $300.

Indicator chart explanation

Buying the strategy

straddle buying

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  1. Break-even line down – this line means that if the price got there, the unrealized profit is zero.

  2. Break-even line up – this line means that if the price got there, the unrealized profit is zero.

  3. RR=1 line down – this line means that if the price got there, the risk to reward is 1.

  4. RR=1 line up – this line means that if the price got there, the risk to reward is 1

  5. The red fill – this area means that if the price got there, the strategy is losing.

Example:

The strategy price bought: $11 (remember the multiplier for stocks is 100, the debit is $1100).

The price of the stock: $82.5

The upper strike price: $85.5

The lower strike price: $79.5

Risk-free rate: 0%

Days to expire: 60

Implied Volatility: 53.3%

Date: 17/08/2020

If at expiration the price will finish between $68.49 - $96.49, the strategy will lose (red area).

If at expiration the price will finish at exactly $96.49 the position will break even (orange line).

If at expiration the price will finish at exactly $68.49 the position will break even (orange line).

If at expiration the price will finish at exactly $107.51 the position will be profitable with $1100 (blue line).

If at expiration the price will finish at exactly $57.48 the position will be profitable with $1100 (blue line).

Different uses for the indicator

Volatility changes: the indicator can be used to give an estimation about the profit/loss lines as a function of volatility changes.

Volatility increase straddle and strangle

+20% Volatility increase

Volatility decrease straddle and strangle

-20% Volatility decrease

Tip: you could add the indicator twice, so you will have a reference point as the charts above.

Lower timeframes: the indicator can be used for intra-day plotting while using a lower timeframe than Daily. This is automatic.

straddle and strangle lower timeframe

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Changing RR (risk to reward) [blue line]

In the picture below, we see the strategy straddle sell, meaning if the position is in the green area you make a profit.

RR = -0.5 -> When we selling this strategy for credit, we want the options to lose value. The inside blue line is where 50% of the total credit is received (the options of the strategy lost 50% of their total value).

RR = 0.5 -> The outside blue line is where the position lost all the credit and 50% of the credit value that was received. The options of the strategy gained value, thus the position is losing.

straddle and strangle selling

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Estimate days until you can realize a profit

Notice in the example above, to realize 50% of the credit received, you need to wait 46 days out of 60.

Selling the strategy

straddle and strangle selling indicator

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  1. Break-even line down – this line means that if the price got there, the unrealized profit is zero.

  2. Break-even line up – this line means that if the price got there, the unrealized profit is zero.

  3. RR=1 line down – this line means that if the price got there, the risk to reward is -1.

  4. RR=1 line up – this line means that if the price got there, the risk to reward is -1

  5. The green fill – this area means that if the price got there, the strategy is winning.

Example (Straddle):

The strategy price sold at: $14.2 (remember the multiplier for stocks is 100, the credit is $1420).

The price of the stock: $82.5

The upper strike price: $82.5

The lower strike price: $82.5

Risk-free rate: 0%

Days to expire: 60

Implied Volatility: 53.3%

Date: 17/08/2020

If at expiration the price will finish between $68.30 - $96.72, the strategy will win (green area).

If at expiration the price will finish at exactly $96.72 the position will break even (orange line).

If at expiration the price will finish at exactly $68.30 the position will break even (orange line).

If at expiration the price will finish at exactly $110.9 the position will be losing $1420 (blue line).

If at expiration the price will finish at exactly $54.11 the position will be losing $1420 (blue line).

For Futures users

Please note that the futures indicator and the stocks indicator are not the same.

The algorithm is made of different equations for futures. Also using the stock indicator on futures will not work properly.

The stock indicator on Futures will not work.

512.png

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The future indicator on Future will work

future option straddle and strangle

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Example on gold futures:

The algorithm is made of different equations for futures.

Even if it looks to be working normally, the result will not be accurate.

In the picture below, the strong lines are the future indicator VS the stock indicator (weak lines).

gold future option straddle and strangle

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Notes

TradingView considerations

 

The indicator is subject to the platform constraints, meaning updates in the platform could change the intended results of the indicator. See the following examples:

Holiday Updates: the indicator is updated 2 years ahead, TradingView updates only the current year. Using long term strategies, especially at the end of the calendar year, could result in a discrepancy at the expiration date that is displayed.

Some indicators have a “fill” option available. When using different timeframes, the fill could be out of place.

We recommend the users to save the indicator settings. This is because once in a while there will be updates in the indicators. Once the update is loaded to Tradingview, the settings will convert to the default settings. We will announce updates in advance.

Algorithm considerations

 

IPO stocks – the life of the option needs to be less than the amount of time the stock is in the market. If it is more, only partial calculations will be displayed. For example, the stock is trading 1 month in the market (ever). Calculating for an option with a life of 2 months will not display the entire calculations for the whole life of the option.

“Data Reset” – loading many bars can result in a slower running time of the indicator. To avoid this, zoom in the chart so you will see only a few bars, then change to different stock, and then change again to the original (intended) stock.

Lower timeframes – the indicator is always doing the calculations, even if it is not being displayed. This can be confirmed when the tag “Calculation complete” is seen. If the tag is displayed but the indicator is not, this can be fixed by reloading more historical bars.

Higher timeframes – the highest timeframe that the indicator can be used, is Daily.

Futures/Stocks – the stock indicators cannot be used for futures and vice versa. Using the wrong indicators on the wrong instrument will result in wrong calculations and errors.

Calculation accuracy – the calculation error is less than 0.01%.

Theoretical model accuracy – the indicator is using the Black-Scholes model. Due to price spreads and/or supply and demand real-world market dynamics, there will be a variation from the theoretical model and the real-world market prices. The model is most accurate when the strike price is close to the instrument price (at the money).

Time accuracy – in the futures markets the indicator might show an extra day after expiration due to holidays. The final result doesn’t change between the last day and the extra day.

Commissions – the algorithm does not take into account any commissions you might have.

Dividends and discounts – the user should be aware of upcoming dividends or discounts.

Personal note

 

If this indicator is truly helpful and gives you viable information please give us credit when using it.

If you have any questions or requests please contact us. We will be happy to help.