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Trade of the Week – Long Straddles

May 4, 2022

Trade of the Week – Long Straddles

The XJO has recently been swinging wildly since 2022 began and has now moved back towards its 50-day and 200-day MAs.

The XJO has recently been swinging wildly since 2022 began and has now moved back towards its 50-day and 200-day MAs.  Volatility is likely to continue with a change in domestic monetary policy, geopolitical tensions, inflationary pressures, supply chain issues and elections on the horizon. The XJO’s implied volatility is sitting at 17.59%, with an IV rank of 49. This will make a straddle a little expensive; however, if you can pick the right stock you might find a relative bargain.

Source: Implied Volatility

Long straddle

A long straddle is useful when you expect a large move in the market, but you are not sure which direction that move will be. The position is constructed with a long call and a long put, both with strikes at-the-money. The position is very theta negative as both legs contribute to time decay. The position also benefits from an increase in volatility levels as both of the legs are long positions.

Source: Implied Volatility

When entering into a long straddle, you want to limit time decay by purchasing the position with plenty of time to expiry (i.e. a month or more). You are also hoping for a quick move in either direction. With a straddle, be willing to lock in a small profit by closing the position early as the time decay will get very expensive as you approach expiry.

For the examples below, the strike of the position entered will be at-the-money and the expiry date will be the June monthly expiry (16/6/22).

CSL Limited

CSL Limited (ASX: CSL) has tested the resistance level around $270 six times since February 2022 and has now recorded three consecutive days of green candles. The stock has also tested the current 50-day MA ($265) support six times since March 2022. The stock could move either way, and with the next resistance around the 200-day MA ($285) on the upside, and the next major support around $255, there could be a good opportunity for a small profit.

Source: Implied Volatility

Source: Implied Volatility

Origin Energy Limited

Origin Energy Limited (ASX: ORG) has been experiencing a strong bullish run and is currently testing a major resistance level around $7 per share. The current resistance was acting as a major support level prior to (and during) the COVID-19 pullback in Feb/Mar 2020. Because of the strong positive and steady run, implied volatility is relatively low. This makes buying long positions cheaper and also more profitable if there is a large move in either direction followed by an uptick in volatility.

Source: Implied Volatility

Telstra Corporation

Telstra Corporation (ASX: TLS) started testing the $4 resistance level in mid-August 2021 and broke through this level in November 2021. The stock has since traded back and is in line with the 50-day and 200-day MAs. The stock has been trading in a range with 30c to both the upside and the downside of $4. There is a chance we could see the stock bounce either above or below the 50 and 200-day moving averages in the coming days.

Source: Implied Volatility

Source: Implied Volatility

Wesfarmers Limited

Wesfarmers Limited (ASX: WES) currently has relatively high IV; however, the stock has proven it can bounce off or break through its 50-day MA very quickly. If buying pressure rises from the current price level, the stock could rise to $52.50 quickly. If the stock is rejected by the 50-day MA, the increased selling pressure could provide the push needed to break the $48 support level on the downside, and towards the next major support level around $45.

Source: Implied Volatility

Source: Implied Volatility

Woolworths Limited

Woolworths Limited (ASX: WOW) is sitting on a major pivot point around $38.50 and is currently being propped up by its 200-day MA. As the 50-day MA trades closer, the stock could continue its recent strong upward trend or it could fail to break through the $38.50 and pull back below the 50-day MA. A move from $38.50 to between $40 and $41 is realistic, as is a pullback to the $36 to $37 range.

Source: Implied Volatility

Source: Implied Volatility

Woodside Petroleum Limited

Woodside Petroleum Limited (ASX: WPL) is offering a very attractive payoff for a long straddle considering its recent volatility and with its current stock price sitting on a key pivot point. We see the major resistance level around $34; however, this level also doubles as a major pivot point, so a quick break through this level is a possibility. On the downside we see major support around $28.50. Should this level be tested, we expect the stock price to bounce quickly as buying pressure rises.

Source: Implied Volatility

Source: Implied Volatility

For further information on using the Implied Volatility platform you can follow this link, here.

To try trading for yourself using the most powerful Options Trading technology in Australia, click here for a trial for our Implied Volatility platform.

We wish you good luck with your trading, and as always if you have any questions, please feel free to contact our trading desk on (03) 8080 5795. Please note, we provide General Advice only. 

Past performance is not a reliable indicator of future performance. 

The opinions expressed in this article are our personal views. 

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General Advice Warning

Any advice provided by Reach Markets including on its website and by its representatives is general advice only and does not consider your objectives, financial situation or needs, and you should consider whether it is appropriate for you. This might mean that you need to seek personal advice from a representative authorised to provide personal advice. If you are thinking about acquiring a financial product, you should consider our Financial Services Guide (FSG) including the Privacy Statement and any relevant Product Disclosure Statement or Prospectus (if one is available) to understand the features, risks and returns associated with the investment.

Please click here to read our full warning.

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