The Simpleton's Guide to Straddles

Today we’re going to focus on long straddles, not to be confused with short straddles which are completely different. Atlantic Straddles (available on Dopex) are long straddles which is why we’ll be focusing on this specific option strategy.

Intro

Atlantic Straddles have proven to be a remarkably simple product to use from a UX standpoint and continue to garner significant usage. As of right now, there is liquidity for the following tokens:

1. $ETH

2. $rDPX

3. $DPX

4. $MATIC

How it Works

A long straddle is a neutral options strategy that requires the purchase of both a call and put with the same strike price and expiration date. You’re essentially betting a token will swing a certain percentage up or down.

When to Use

Straddles are best used when you expect there to be volatility. Market-moving events such as that of the FOMC or other economic data releases are prime examples of this. With straddles, you’re set to profit from both bullish and bearish swings.

Calculating Break-even Point

Let’s assume the token price is $100 and the total option premium is $8. 8 / 100 = 0.08 = 8% That would mean the token needs to move 8% either up or down in order for you to breakeven. Anything beyond the breakeven is profit.

Risks

1. Time decay may work against you. In the case of Atlantic straddles, you have 2 days.

2. Expected volatility may never come as the value of the straddle approaches zero.

Explanation from Tz

Summary

Straddles are an easy to use product when you want to bet on volatility. You have two days before the contract expires, so this is something to keep in mind. As a writer, this is a yield opportunity if you expect the market to crab.