How to Stack Short Option Straddles

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Short option straddles: In this video, I want to go over a specific trade that we did in USO which is a stacking straddle that we're going to go over. And, that's a new trade that we entered today but before we do that I want to go over all the closing trades that we had today.

I'm not going to go through charts with a lot of these, but, really, this day kind of proves the point that, when you make a lot of trades, when implied volatility is high then you just are patient enough to hold onto some of these trades, you get an opportunity like this to continuously start taking off trades.

And, today was just the day where we had a lot of trades that we just took off. But, we've been doing this for the last two weeks now. Just a day after day. Trades that here are price targets and here are exit targets, we start taking them off systematically and robotically in our portfolio. And, today was just a really good day, we had a ton of profits that we banked. 

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We took our straddle off in IWM, bought that back for 566 debits. So, turned in a nice $189.00 profit on that one. The straddle that we had in OIH pulled in $104.00 profit and the straddle there. The buy due, which was our call credit spread, we took in $51.00 on buy due.

In Walmart, we also had a nice little profit; we bought back our straddle in Walmart at $93.00 per profit. Had a nice big profit in Twitter, I have $122.00. The straddle in DDD $71.00, the HPQ straddle of $88.00 and the Rig straddle of $80.00.

So, again, you can see, these are not huge, huge, thousand dollar wins obviously. But, all of this stuff adds up over time, and it more than overshadows any big loser's that we might have in the portfolio long term. This is what high probability trading is all about. And, again, a lot of these things that we got out of today are just continuous working orders.

These are just orders that we've had in to be filled at certain price targets on exit. And, we do this all the time systematically just so we can manage all of our trades, all the way through and make it as robotic and nonemotional as possible. Again, the hardest thing to do in this business is to get into the trade in the right way with the right pricing. Getting out of the trade should be pretty easy. And, so, I think we proved that point here today.

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As far as the new trade we did, we entered a new straddle in USO, now this is a stacking trade, so that means we are stacking this trade on top of an existing trade. It's not a hedge; we're just slowly getting into and building a position in USO. Now, many of you know that I'm a fan of not putting all of our money at one time at one strike price and going from there.

I like to spread my money out across different strike prices and different times. So, I'll take, if I want to get into, let's say, five contracts; I'd rather get into five contracts maybe a couple of days apart. And just kind of spread that risk over time so that you're not kind of throwing all of your money into the market at one time. And I think this proves the point here today with USO.

So, we did the October options again. We did the 15.5 strike calls and the 15.5 strike puts. Those were the closest to where the stock was trading at, at the time, and took in a nice big credit of $147.00. So, here's where USO is right now. Implied volatility is in the 65th percentile. So, it's still high it's obviously lower than where it's been, but, we still want to do something in USO because it's one of the highest ones out there right now.

And, you can see, stock right now is trading about 15.05, that's where it closed today. We did the 15.5, so we're just slightly bullish on this one. You'll see why we did that here in a second. But, we're just slightly bullish on that, and that's going to give us a little bit more of an overall balance through the position in USO.

So, right now, or, before we made the trade today, we had the 14.5 straddle over the market. So, you can see this is where the straddle peeks here with USO. Remember, USO is trading right about here, at about 15. So, before today, before we entered the 15.5 straddle, most of our trade was a little bit south of where the stock is trading right now.

So, we could even say that we're maybe hoping for a little bit of a bearish move or a downside move in USO to get us back to neutral. But, instead of making an adjustment to this existing trade, what we decided to do was to add the straddle right at 15.5.

So, now that we added the straddle at 15.5, which is up here, so this is where our new straddle is, 15.5, that gives us a lot more balance and it re-centers our entire position exactly where the stock is trading right now. So, you can see, 15's where USO is trading. We're almost exactly re-centered over where the stock is trading right now.

And, again, this is why I'm personally a fan of spreading out your trades like this so that you're not pigeon holing yourself into one particular strike here or, one particular strike here. But, this ability to be a little bit flexible in your strike price selection over time and spreading these trades out now gives us a little bit more balance.

And, we've already started to see some time negates start to happen in these contracts and some volatility start to be sucked out of them. So, that's going to help us out as we keep going further and further towards October expiration. So, again, I like this idea of, again, spreading out these trades just a little bit more.

Here is what the positions look like in USO, you can see our original position was right here at about 14.5, now we've got the 15.5 right here so, we're pretty much neutral and balanced around 15 which is exactly where the stock is trading right now.

So, hopefully, you guys enjoy this video, as always, if you have any comments or questions, please, add them right below, and until next time, happy trading.

About The Author

Kirk Du Plessis

Kirk founded Option Alpha in early 2007 and currently serves as the Head Trader. In 2018, Option Alpha hit the Inc. 500 list at #215 as one of the fastest growing private companies in the US. Formerly an Investment Banker in the Mergers and Acquisitions Group for Deutsche Bank in New York and REIT Analyst for BB&T Capital Markets in Washington D.C., he's a Full-time Options Trader and Real Estate Investor. He's been interviewed on dozens of investing websites/podcasts and he's been seen in Barron’s Magazine, SmartMoney, and various other financial publications. Kirk currently lives in Pennsylvania (USA) with his beautiful wife and three children.