Option Strategies

Follow these steps to implement the short straddle strategy:

1. In the Initializeinitialize method, set the start date, end date, cash, and Option universe.
Select Language: C#Python

private Symbol _symbol;

public override void Initialize()
{
    SetStartDate(2017, 4, 1);
    SetEndDate(2017, 6, 30);
    SetCash(100000);

    UniverseSettings.Asynchronous = true;
    var option = AddOption("GOOG");
    _symbol = option.Symbol;
    option.SetFilter(universe => universe.IncludeWeeklys().Straddle(30));
}

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 Straddlestraddle filter narrows the universe down to just the two contracts you need to form a short straddle.

2. In the OnDataon_data method, select the expiration date and strike price of the contracts in the strategy legs.
Select Language: C#Python

public override void OnData(Slice slice)
{
    if (Portfolio.Invested || 
        !slice.OptionChains.TryGetValue(_symbol, out var chain))
    {
        return;
    }

    // Find ATM options with the nearest expiry
    var expiry = chain.Min(contract => contract.Expiry);
    var strike = chain.OrderBy(contract => Math.Abs(contract.Strike - chain.Underlying.Price)).First().Strike;

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

3. In the OnDataon_data method, select the contracts and place the orders.

Approach A: Call the OptionStrategies.ShortStraddleOptionStrategies.short_straddle method with the details of each leg and then pass the result to the Buybuy method.

Select Language: C#Python

var shortStraddle = OptionStrategies.ShortStraddle(_symbol, contracts[0].Strike, expiry);
Buy(shortStraddle, 1);

short_straddle = OptionStrategies.short_straddle(self._symbol, contracts[0].strike, expiry)
self.buy(short_straddle, 1)

Approach B: Create a list of Leg objects and then call the Combo Market Ordercombo_market_order, Combo Limit Ordercombo_limit_order, or Combo Leg Limit Ordercombo_leg_limit_order method.

Select Language: C#Python

var contracts = chain.Where(contract => contract.Expiry == expiry && contract.Strike == strike);
if (contracts.Length < 2) return;

var atmCall = contracts.Single(x => x.Right == OptionRight.Call);
var atmPut = contracts.Single(x => x.Right == OptionRight.Put);

var legs = new List<Leg>()
    {
        Leg.Create(atmCall.Symbol, -1),
        Leg.Create(atmPut.Symbol, -1)
    };
ComboMarketOrder(legs, 1);

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)

The payoff of the strategy is

The following chart shows the payoff at expiration:

The maximum profit is $C^{ATM}_0 + P^{ATM}_0$. It occurs when the price of the underlying asset remains exactly at the strike price upon expiration.

The maximum loss is unlimited if the underlying price rises to infinity or drops to zero at expiration.

If the Option is American Option, there is a risk of early assignment on the contracts you sell.

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

Therefore, the payoff is

So, the strategy loses $5,277. The early assigment doesn't influence the payoff.

The following algorithm implements a short straddle Option strategy:

public class ShortStraddleAlgorithm : QCAlgorithm
{
    private Symbol _symbol;
    public override void Initialize()
    {
        SetStartDate(2017, 4, 1);
        SetEndDate(2017, 6, 30);
        SetCash(100000);

        var option = AddOption("GOOG");
        _symbol = option.Symbol;
        option.SetFilter(universe => universe.IncludeWeeklys().Straddle(30));
    }

    public override void OnData(Slice slice)
    {
        if (Portfolio.Invested || 
            !slice.OptionChains.TryGetValue(_symbol, out var chain))
        {
            return;
        }
        
        // Find ATM options with the nearest expiry
        var expiry = chain.Min(contract => contract.Expiry);
        var contracts = chain.Where(contract => contract.Expiry == expiry)
                                .OrderBy(contract => Math.Abs(contract.Strike - chain.Underlying.Price))
                                .ToArray();

        if (contracts.Length < 2) return;

        var shortStraddle = OptionStrategies.ShortStraddle(_symbol, contracts[0].Strike, expiry);
        Buy(shortStraddle, 1);
    }
}