Most traders are familiar with the long Straddle or Strangle option strategy. A Straddle buys the same strike Put and Call in the same expiry and the Strangle buys a different strike Put and Call in the same expiry. The strategy often appeals to novice traders because it appears that the position can be profitable whether the underlying instrument goes up or down, and that’s true…sort of. How can you lose on a position if it profits if price goes up or down? Well, as it turns out, you can lose and you will lose often if you buy a Straddle or Strangle and just hold it into expiry. That’s due to the relatively large amount of value lost to the negative Theta that occurs due to the passage of time. The one constant in option trading, as in life, is the passage of time. Straddles and Strangles are very expensive to buy. So expensive in fact that many traders will sell them (or a defined risk version such as an Iron Condor) to take advantage of that Theta decay. There’s no reason a trader can’t do both such as selling a short-term Iron Condor to reduce the net Theta decay of a longer-term Straddle or Strangle. If I owned a long Straddle with approximately 60DTE (days to expiration) I could sell as many as 35-40 of the 0DTE (same day expiry) Iron Condors over the same period of time to substantially reduce the net Theta decay! I mention this simply to expand your understanding of the possibilities of trading around a long Straddle or Strangle but I won’t be going into that variation in this post. Instead, I’ll be discussing several other adjustment trades that can be made to bring in option premium income while utilizing a bullish or bearish directional long Straddle or Strangle strategy.
Since a prominent feature of typical Straddles and Strangles is their bi-directional nature why would I want to tilt that trade to either a bullish or bearish bias? If you follow me @VegaOptions on X or have read any of my other blog posts you’ll know I’m a directional trader. That’s my biggest edge in trading. My second biggest edge is the ability to customize standard option strategies to fit my directional bias. Let’s look at some risk profiles to illustrate the point.
For purposes of the discussion of the trade below let’s assume that I have a near-term bullish bias based on the chart. Below is a relatively neutral 2-lot Straddle in XSP. I’m using XSP because its 1/10th the size of SPX and can be traded by traders who prefer the smaller size risk. I’ve simulated what the trade would look like if XSP advanced by 1% over the next 3 trading days.
Buying only a 1-lot Put along with the 2-lot Call adds bullish Deltas to the position so it matches my bullish bias. The single Put adds some protection in case XSP moves lower but this is primarily a bullish trade. The 1-Put/2-Call structure would be an Unbalanced Straddle.
Below is what separates this strategy from the buy and hold Straddle. The standard Straddle might see a profit on the 1% move up in XSP only to be followed by an even larger loss if price then drops by 1%. I take advantage of any directional move to adjust the position! Below is what the position would look like if I bought that second Put after that 1% move up. It would be significantly less expensive due to the rally so, after this adjustment, if XSP continued to rally that’s great for the position but if it moved back down 1% there would still be a profit!
To further increase downside profit potential while still maintaining a unlimited amount of upside profit potential I could sell a 4-lot of Call Vertical Credit spreads. That wouldn’t have a margin requirement and would have a limited effect on the upside profitability over the next week or two. This adjustment would raise the current profit/loss line (purple line on the risk profile) well above the breakeven line. The position would still have negative Theta but due to these trades the position would likely have 1-2 weeks of ‘free’ money to allow for a bigger directional move before the purple line dips back below the breakeven line.
Below is the completed position showing what the profit would be on a plus/minus move of 1% and 2%. This position has unlimited upside and downside potential! A 5% move lower would likely have a $2,000+ profit and a 10% move lower would have a $6,000+ profit!
The above analysis has been theoretical based on current option pricing. The risk profile below is what my actual /ES (SPX futures) position was just prior to Friday’s close. By using a similar strategy as mentioned above I’ve established a position where I can profit in either direction and I haven’t limited that profit. My current bias is that SPX will likely go higher over the next week but then open a window of potential weakness where SPX could move sharply lower. Of course it could also just continue it’s grind higher so that’s why I’m using this strategy. I prefer to make money in either direction, how about you?
Just prior to Friday’s close I sold these Jul19 Call Vertical Credit spreads. This transaction is actually a rolling trade, not a new position. By selling the 5400 Calls (to close) which were $100 ITM (in-the-money) and buying the 5450 Calls I was able to reduce my cost basis in the position by $36K
Below is what the current risk profile looks like. I’ll still profit from a continued rally but I’m building a decent size bearish position in Aug expiry. If price moves higher next week I’ll likely roll the 5450 Jul19 Calls up to the 5500 strike bringing in another large credit but still allowing for additional upside profits if the rally continues. I’ll also likely add another 10-20 lot in Aug expiry Puts.
Below is the /ES daily chart showing where I was resting the order on Friday to roll up those Calls. I rest orders at key levels such as Fib retracements/extensions and prior highs or lows.
Finally, below is the similar position in the PDT account. I maintain that account for someone else but also as a challenge to myself to manage a smaller account. A PDT account is less than $25K so it requires smart use of the margin requirement and it’s limited to 3 ‘day trades’ in a 5 trading day period. The margin req. for trading /ES options is similar to a portfolio margin account for a larger account so I often use those for this account. /ES options are also exempt from the 3 day trades rule so adjustments can be made as needed. Below is the PDT account position just prior to Friday’s close.
This is the PDT position after Friday’s close.
That wraps up this post. It’s longer than I prefer but it’s important. Remember, nothing in this post or any of my other posts here or on X are trading advice! If you make a trade based solely on what someone else says or does then you are likely to end up losing money. I’ve developed these techniques and strategies over many years so I understand when to enter, when to exit and when to adjust. If you want to really learn this strategy you’ll read it over and over again and you’ll simulate it using a paper money account to make sure you understand it!
If you have comments or questions, leave them down below or post at @VegaOptions on X.
have a few questions… first is, you mention offsetting 60 dte straddles with 0 dte Iron Condors. Do you mean simply selling a 0 dte call and put only or also buying long 0dte call and put? If not mistaken (though I could be) I think you could sell only the 0dtes since their buying power debit is offset by the long straddle?
From the post “I could sell as many as 35-40 of the 0DTE (same day expiry) Iron Condors over the same period of time to substantially reduce the net Theta decay”! An Iron Condor is comprised of an OTM Call Vertical spread and an OTM Put Vertical spread and when I sell that I have a positive Theta position. That daily positive Theta can offset much of the negative Theta from the long Straddle or Strangle.