What is straddle strategy? Is straddle a good strategy? How can we make money using straddlestrategy in option trading?
A straddle is an option trading strategy. It is a non directional strategy. In this strategy we short a call and a put option at ATM. They should be of the same exiry, same security and same strike price.
Since statistically it is proved that more than 70% of the time the markets are sideways ie., non directional, definetly this is a good strategy. We can make money on account of the theta decay. The premium of the options keep falling down daily and finaly reach zero on the day of expiry if they are not In The Money – ITM.
We should devise a plan with entry time, exit time, stop loss, profit target. We should also have risk management and position size in place taking into account the capital we are investing to trade.
Thereafter we should back test our plan for at atleast with past five years data. See the result, such as profitability, drawdowns, and other factors. Once we are satisfied, forward trade (paper trade) for a month and then start trading with one lot first. Once we gain confidence and we are satisfied that the plan is working according to the test results, we can scale up.
Then comes the most important prerequisite to be a succesful trader with consistent profits. We should learn to keep our emotions, greed and fear in control. We should never fail to follow our trade plan and be disciplined while appraching our trades.