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# How to Place a Straddle Trade Like a Pro

How to Place a Straddle Trade Like a Pro
April 29, 2015

Guest Post by Chris Irvin, Director of Options Education

If you’re one of my students, than you know I’m a huge fan of straddle trades. Well, I guess I talk about them a lot because the other day a budding trader asked me:

“Can you give me the winning percentage of these trades?”

I thought about it for a minute and I realized the question is not: “What is the probability of a winning straddle trade?”, the question is:

“What is the probability of a winning straddle trade on a certain stock?”

Straddles require that the stock move a significant amount after a major event or news announcement, like an earnings report.

From my experience, a ten to fifteen percent move will often do the trick. So, before I place a straddle trade, I determine if the stock that I am planning to trade has the potential to move that amount.

If the answer is no, then the trade has a very low probability of making money.

If the answer is yes, then the probability of making money is high.

Take NFLX for instance. Over the past four earnings announcements NFLX has moved mountains.

# Previous NFLX earnings announcement moves

## 1/20/15

This one would have worked nicely based on the current situation.

• Pre Earnings Close – \$349.40
• Post Earnings Open – \$414.68 (\$65.28 move or 18%)
• Post Earnings Peak – \$457.38 (\$108.28 move or 30%)

## 10/15/14

This one would also have worked nicely based on the current situation.

• Pre Earnings Close – \$448.59
• Post Earnings Open -\$332.73 (\$115.86 move or 25%)
• Post Earnings Low – \$331.00 (\$117.59 move or 26.2%) Immediate Bounce

## 7/21/14

This one would not have worked.

• Pre Earnings Close – \$452.00
• Post Earnings Open – \$442.98 (\$9.02 move or 1.9%)
• Post Earnings Low – \$412.51 (\$39.48 move or 8.7%)

## 4/21/14*

• Pre Earnings Close – \$348.49
• Post Earnings Open – \$376.63 (\$28.14 move or 8%)
• Post Earnings Peak – \$380.88 (\$32.39 move or 9.2%) Immediate Drop

*Over the last four earnings announcements this trade would have worked out 50% of the time, but over the past two earnings announcement the trade would have worked 100% of the time.

And yes, if you were keeping track of NFLX during this most recent earnings announcement, it moved \$56.26 (11.8%) overnight and kept on going.

So what is the probability of NFLX having a winning straddle trade next earnings season? If you take into account the previous 5 earnings seasons it is 3 out of 5 or 60%. If you take into account the past 3 earnings seasons it is 100%.

A straddle is not a trade that can be placed on any stock. Most stocks do not move enough to produce a profit. If you do some homework you can find stocks that do have a history of this type of move and that increases your probabilities.

Hope this helps you if you’re considering placing a straddle trade. I you still need more information, or would like to learn how to confidently trade Options, come to one of my workshops by filling out the form below.

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