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1. Better Way to Straddle/Strangle?
By Timothy Collins
12:27 a.m. EDT
After a week of back and forth, I get the sense of a big move coming in the market soon. The typical way to play this would be with a straddle or a strangle on the SPDR (SPY). What if there were a there was a higher-probability way of playing this same concept?I compared the SPY $103 & $104 straddles, along with the 102,103, or 104 calls paired with the 105, 104, and 103 puts, respectively, with the idea of buying Direxion Daily Large Cap Bull 3x (BGU) puts along with Direxion Daily Large Cap Bear 3x (BGZ) puts. I used the BGU 48 puts with the BGZ 24 puts (0.73 BGU contracts/1.45 BGZ contracts) and the BGU 50 puts along with the BGZ 25 puts. After applying our drag coefficient model to the worst-case price movements of the SPY for straddles, it was evident to see that the effects of volatility decay significantly improved your odds of making a profit using the BGU-BGZ pairing than any of the SPY pairings tested. The BGU $48 - BGZ $24 put pairing showed potential profits in two of the three worst-case scenarios, while showing a loss that was in line with the SPY possibilities in the other. The SPY setups only showed a profit in 1 out of 15 cases, and in that case, either of the BGU-BGZ setups showed a higher profitability projection. Furthermore, if you take the BGU $48 - BGZ $24 put setup as a long and sell the SPY 104 call and 103 put against it, the result was a profit in all three of the worst-case scenarios. With three weeks until expiration, time is starting to move against you in any straddle/strangle; however, volatility in a rangebound format can work for you instead of hindering performance. Long BGU and BGZ puts.