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Option Strategies

Long 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. Select Language:
    def initialize(self) -> None:
        self.set_start_date(2017, 4, 1)
        self.set_end_date(2017, 6, 30)
        self.set_cash(100000)
    
        self.universe_settings.asynchronous = True 
        option = self.add_option("GOOG")
        self._symbol = option.symbol
        option.set_filter(lambda universe: universe.include_weeklys().straddle(30))

    The straddle filter narrows the universe down to just the two contracts you need to form a long straddle.

  3. In the on_data method, select the expiration date and strike price of the contracts in the strategy legs.
  4. Select Language:
    def on_data(self, slice: Slice) -> None:
        if self.portfolio.invested:
            return
    
        chain = slice.option_chains.get(self._symbol, None)
        if not chain:
            return
    
        # Find ATM options with the nearest expiry
        expiry = min([x.expiry for x in chain])
        strike = sorted(chain, key=lambda x: abs(x.strike - chain.underlying.price))[0].strike
  5. In the on_data method, select the contracts and place the orders.
  6. Approach A: Call the OptionStrategies.straddle method with the details of each leg and then pass the result to the buy method.

    Select Language:
    long_straddle = OptionStrategies.straddle(self._symbol, strike, expiry)
    self.buy(long_straddle, 1)

    Approach B: Create a list of Leg objects and then call the combo_market_order, combo_limit_order, or combo_leg_limit_order method.

    Select Language:
    contracts = [x for x in chain if x.expiry == expiry and x.strike == strike]
    if len(contracts) < 2:
        return
        
    atm_call = [x for x in contracts if x.right == OptionRight.CALL][0]
    atm_put = [x for x in contracts if x.right == OptionRight.PUT][0]
    
    legs = [
        Leg.create(atm_call.symbol, 1),
        Leg.create(atm_put.symbol, 1)
    ]
    self.combo_market_order(legs, 1)

Strategy Payoff

The payoff of the strategy is

CATMT=(STKC)+PATMT=(KPST)+PT=(CATMT+PATMTCATM0PATM0)×mfee
whereCATMT=ATM call value at time TPATMT=ATM put value at time TST=Underlying asset price at time TKC=ATM call strike priceKP=ATM put strike pricePT=Payout total at time TCATM0=ATM call value at position opening (debit paid)PATM0=ATM put value at position opening (debit paid)m=Contract multiplierT=Time of expiration

The following chart shows the payoff at expiration:

Strategy payoff decomposition and analysis of long straddle

The maximum profit is unlimited if the underlying price rises to infinity or substantial, KPCOTM0POTM0, if it drops to zero at expiration.

The maximum loss is the net debit paid, CATM0+PATM0. 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

CATMT=(STKC)+=(934.01835.00)+=98.99PATMT=(KPST)+=(835.00934.01)+=0PT=(CATMT+PATMTCATM0PATM0)×mfee=(98.99+022.323.9)×1001.00×2=5277

So, the strategy gains $5,277.

The following algorithm implements a long straddle Option strategy:

Select Language:
class LongStraddleAlgorithm(QCAlgorithm):
    def initialize(self) -> None:
        self.set_start_date(2017, 4, 1)
        self.set_end_date(2017, 6, 30)
        self.set_cash(100000)
        
        option = self.add_option("GOOG")
        self.symbol = option.symbol
        option.set_filter(lambda universe: universe.include_weeklys().straddle(30))

    def on_data(self, slice: Slice) -> None:
        if self.portfolio.invested:
            return

        chain = slice.option_chains.get(self.symbol, None)
        if not chain:
            return

        # Find ATM options with the nearest expiry
        expiry = min([x.expiry for x in chain])
        contracts = sorted([x for x in chain if x.expiry == expiry],
            key=lambda x: abs(chain.underlying.price - x.strike))
        
        if len(contracts) < 2:
            return

        # The first two contracts are the ATM Call and the ATM Put
        contracts = contracts[0:2]

        long_straddle = OptionStrategies.straddle(self.symbol, contracts[0].strike, expiry)
        self.buy(long_straddle, 1)

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