Tips to Enter & Exit Short Straddle Options Trading Position: Options, Futures, Derivatives & Commodity Trading

Tips to Enter & Exit Short Straddle Options Trading Position

Tips to enter the Short Straddle Option Trading Position:

Continuing further from our earlier part on Profit & Loss Calculations for Short Straddle Options Trading, here are the details about when to enter and exit the short straddle option position.

An option trader should enter the Short Straddle Option Trading Position with the following tips:

- In expectation of stability in the underlying stock or index price. In other words, enter only when the stock price is expected to remain in a limited price range.

- Keep a short time to expiry (at the max 1 month) to benefit the max from time decay which is the only factor in the favor of short straddle option trader

- Avoid picking up highly volatile stocks which are expected to show large swings in prices

- Avoid trading short straddles around big event like earning reports, project bidding outcome, research reports outcome, court cases outcome for the company, patent related decisions, and so on

Tips to exit Short Straddle Option Trading Position:

An option trader should exit the Short Straddle Option Trading Position with the following tips:

- If any expected/unexpected event suddenly occurs, an option trader is advised to book losses and exit immediately

- Keep strict stop losses on both sides - upwards and downwards - and exit with a loss if the stop loss is hit. Stop loss can be both on option price movements as well on the underlying price movements

- Don’t close both the positions (Call and Put) at the same time, if any expected/unexpected movement has happened in the stock. Say if the stock price has risen from $50 to $60 (your upward stop loss), square off the call but keep the put. If the stock price has declined from $50 to $40 (your downward stop loss), square off the put and keep the call. Usually, after some time there is a price retract and the other option may also be worth if you hold it.

- Time decay works in favor of short straddle trader. If the stock is remaining in the confined zone, and there is no possibility of any adverse price movements, its better to keep it till expiry.

- Keep an eye on implied volatility - if it is going high, then it will be bad for Short Straddle option position.

- This is a direction neutral option trade - you are better if there is no movement in either direction
Let's head on to next part Greeks for Short Straddle Option: Delta, Gamma, Rho, Vega Theta
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