A straddle strategy can help option players manage volatility
About a month ago I wrote about the extreme low historical volatility Reading for the S&P 500 Index (SPX). A low volatility of the index does not necessarily mean a lack of opportunities for options traders. With well over a thousand shares with corresponding option liquidity, there are certainly some shares that offer opportunities. Below, I’ve calculated the monthly straddle returns for stocks over the past few years, summarized the data, and listed some stocks that options traders mispriced the most.
Find stocks with mispriced options
To identify stocks with attractive options, I calculated the returns on straddles over the past two years. A straddle consists of buying a call option and a put option on a share. Call and put should have the same strike and expiration date. This takes direction out of the equation because the position can benefit whether the stock goes up or down. However, the stock movement must be greater than simply buying a call or put as it must be enough to cover both of the premiums you have bought.
Straddle Returns Summary: Notable Stock Lists
The following data assumes that you bought a straddle at the money a little over a month before it expired. I’ve done this for every regular monthly expiration day (the third Friday of the month) for the past two years. This timeframe corresponds to the purchase of a straddle, which expires on Friday, August 20ththe. It is assumed that you held it to expiration and closed to intrinsic value.
Measured by average straddle return, the table below shows the top 25 stocks for straddle games over the past two years (using this method). I also show the median straddle return, the percentage that was positive, and the percentage that would have doubled your money. The last column shows the percentage of positive straddles that were positive due to the call option. In other words, of all positive straddles, it is the percentage that was positive due to an increase in the stock price as opposed to a decrease in the stock price. These stocks were much more volatile than what option players had priced in.
Below is another list of 25 stocks that have been good straddle games over the past few years. These are stocks that had the highest percentage positive. These stocks may not have made you the most money on their straddles, but they have been more consistent winners than others.
Finally, here is a list of the stocks whose straddles have doubled the most. These stocks had options that would most likely make you a big winner.