What are the catches of being short options straddles?

Hi guys.

I'm missing something in my reading; what are the risks of being short option straddles?

I know that foremost is options volatility. What are the other risks? Do Ex-dividend dates affect pricing? What else?

Thanks!

 

Price of the underlying, perhaps? What's the risk of playing in traffic?

Delta, vega, gamma, theta, rho, vomma, vanna, speed, etc.

 

What's the reward of long option straddles?

 

If you're short a straddle, you only make money if the stock does not move more than the sum of the premiums you collected. So if the stock runs up or tanks, you're in the red!

 

The reward comes from collecting a very high price when selling one of your options. That occurs when the stock makes a major move.

One occasional benefit is an IV surge - and then you may collect a profit on each side of the straddle

Mark

 

I meant price of the underlying when I mentioned option volatility.

I'm just trying to find out if there are other risks outside of option volatility/greeks/underlying/assignment. Like for example ex-dividend date or something that comes up when you are short that I wouldn't realize as usually being long.

 

Nonsense. You are referring to what happens when expiration arrives. Intelligent investors do not hold positions that long.

And so what if you are in 'the red'? Do you only choose investments that are guaranteed to earn a profit?

Mark

 

Mark's comments are appropriate. I have also traded short straddles. With lower IV (18-25), I found them to be profitable. Compared to strangles, though, at higher IV, you do not get as much protection (the legs of the strangle are further from the underlying than the total premiums received). I would place the short straddle, and exit one of the legs when its value was less than 20% of the premium received. Then, you want the underlying to reverse to profit from the other leg. I also exited both legs--no matter what--on the Monday before Expiration Friday to avoid a gamma explosion. Most of the time I was able to keep 50% of the total premiums received. I always trade the ES futures options (disclosure).

 

(It was rhetorical)

 

Whatever it is that you are reading - especially if it touts the idea of selling straddles - should be tossed into the garbage immediately - if it really does not explain the risk of owning such positions.

Mark