#Straddle strategy, as a classic tool, captures the potential for price fluctuations and is becoming a popular choice in the #加密期权 field. This article briefly explores the concept, application, and pros and cons of the Straddle strategy in #Jasper , helping you navigate risks and seize opportunities amid volatility.

Calm waters do not nourish dragons, turbulent currents reveal kings.
— — Every significant leap in the market is the heartbeat of Straddle.

Note before reading: The strike price of JasperQuant is always consistent with the option purchase price.
This mechanism makes options trading as simple as spot trading.

Introduction to the Straddle strategy

Concept introduction

Straddle is a non-directional option strategy
It is an options combination strategy that simultaneously buys call options and put options for the same underlying asset, expiration date, strike price, and scale.

Investors expect that the price of the underlying asset will have significant fluctuations before the option expires,
But when uncertain whether the direction of volatility is upward or downward, the Straddle strategy can be used.

By simultaneously buying call and put options, whether the underlying asset price rises significantly or falls significantly,
As long as the price fluctuation is large enough, when the profit of one of the option orders is sufficient to compensate for the premium costs of both option orders,
profit can be achieved.

Premium cost is fixed and does not expand losses with price fluctuations.
Therefore, when using the Straddle strategy, the greater the price volatility, the greater the harvest.

For example

Predict that ETH will have significant volatility at market price 3200 but cannot determine the direction. At this time, the Straddle strategy can be used.

At this point, simultaneously buy call options and put options with a scale of 0.2 ETH. The leverage ratio is 280x, and the cost of the two orders (premium) is 3200 × 0.2 ÷ 280 × 2 = 2.29 × 2 = 4.58 U.

If the settlement price is 3300
Call option profit, profit: (3300–3200) × 0.2 = 20 U, cost: -2.29 U.
Put option no profit, profit: 0, cost: -2.29 U
Net profit: 20 U — 4.58 U = 15.42 U
Actual return rate: 15.42 ÷ 4.58 × 100% = 336.68%.

Or, if the settlement price is 3050
Call option no profit, profit: 0, cost: -2.29 U.
Put option profit, profit: (3200–3050) × 0.2 = 30 U. Cost: -2.29 U
Net profit: 30 U — 4.58 U = 25.42 U,
Actual return rate: 25.42 ÷ 4.58 × 100% = 555.02%.

So, after using the Straddle strategy at a price of 3200,
Whether the price rises (for example, to 3300) or falls (for example, to 3050),
As long as the profit exceeds the cost (for example, 4.58 U), profit can be achieved.

Straddle strategy's break-even range

Break-even range

After the Straddle strategy is initiated, there are two key points A and B.

When the price rises to point A, the profit just covers the cost of the two orders (premiums);
When the price rises to point B, the profit just covers the cost of the two orders (premiums).

Among them, point A is the [upward break-even point], and point B is the [downward break-even point].
The price range between point A and point B is the [break-even range] for this set of Straddle orders.

When the settlement price is within the break-even range, the net profit of this set of orders is zero because it is not enough to cover the cost. When the settlement price is outside the break-even range, the net profit of this set of orders is positive and increases with the expansion of the range beyond.

Calculation method:
Upward break-even point = call option purchase price + total cost ÷ option scale;
Downward break-even point = call option purchase price — total cost ÷ option scale.

For example

Continuing from the previous example,
The purchase price of both the call option and the put option is 3200,
Option scale 0.2 ETH, total cost 4.58 U.

Upward break-even point = 3200 + 4.58 ÷ 0.2 = 3200 + 22.9 = 3222.9;
Downward break-even point = 3200–4.58 ÷ 0.2 = 3200–22.9 = 3177.1.
The break-even range for this set of orders is 3177.1 ~ 3222.9.

Pros and cons of the Straddle strategy

Advantages of the Straddle strategy

  • Just predict volatility
    One of the main advantages of the Straddle strategy is its neutral attitude towards market direction.
    In a highly uncertain market environment, predicting the specific direction of asset prices can be very difficult.
    The Straddle strategy allows investors to take advantage of market volatility without the risk of incorrect directional predictions by simultaneously buying call and put options. As long as the market experiences significant volatility, whether up or down, the strategy has the potential to be profitable.
    This allows investors to respond flexibly to market uncertainty without the need to judge direction, only needing to predict volatility.

  • The stronger the volatility, the higher the return
    The cryptocurrency market is known for its high volatility, making the Straddle strategy particularly attractive in such markets.
    Since cryptocurrency asset prices often experience significant fluctuations, this volatility can provide high potential returns for the Straddle strategy.
    For example, if a cryptocurrency is expected to have significant price movement due to regulatory news or technical updates, investors using the Straddle strategy can take advantage of this volatility to achieve profits without worrying about predicting the actual price direction.

  • Risk is controllable
    At the opening of a position, the investor's maximum loss is already determined — the sum of the premiums paid for the call and put options.
    The Straddle strategy provides clear risk management, even if the market does not move as expected, investors know how much they will lose at most. This feature makes the Straddle strategy an attractive choice for risk-aware investors.

Disadvantages of the Straddle strategy

  • Double premium cost
    When investors use the Straddle strategy, they need to simultaneously purchase a call option and a put option.
    This means they must pay the premiums for both options, which are already fixed costs at the initiation of the strategy.
    These costs reduce potential profits and increase the break-even point of the trade. Therefore, only when the expected market volatility is large enough and prices move significantly can these costs be covered and profits achieved.

  • High profit balance point requirements
    Due to the need to pay for two premiums, the break-even range of the Straddle strategy is relatively large.
    This means the price of the underlying asset must move far enough before the options expire to exceed the total premium costs of both orders.

  • Insufficient market volatility
    If the market's volatility before the option expires does not meet expectations, profits cannot cover the premium costs.
    As time goes on, the time value of options gradually decreases,
    If market volatility does not continue to increase, then both call and put options will not yield profits.

Applicable scenarios for the Straddle strategy

Before major events

In financial markets, major events often have a significant impact on asset prices, but the direction of this impact is difficult to predict accurately. The Straddle strategy demonstrates its unique application value just before major events.

For example, when important policies and regulations are introduced, major updates to large cryptocurrency projects are released, or significant changes in the global macroeconomic situation that may affect cryptocurrencies are imminent, investors generally face significant uncertainty. At this time, asset prices may fluctuate significantly due to different expectations and emotional fluctuations among market participants.

Support and resistance levels

Support and resistance levels are commonly used concepts in technical analysis, reflecting the balance area of power between buyers and sellers in the market.
When the price approaches a support or resistance level, the market is often in a relatively sensitive state, and the Straddle strategy can perform well when the price breaks these key positions.

Assuming the price has been hovering in a relatively stable range, forming clear support and resistance levels. As the price gradually approaches the resistance level, market participants have different expectations about whether the price can break through the resistance level.

Implied volatility

Expecting volatility to rise, which often occurs before major events or data releases, such as major project upgrades, regulatory decisions, or macroeconomic events. In this case, investors may adopt the Straddle strategy because as volatility increases, the intrinsic value of options may rise, thus generating profits.

Volatility is at a historical low, and the cost of options is relatively low.
If investors believe that market volatility will recover from this suppressed state, they can use the Straddle strategy.

When volatility is at a historical high, it may indicate that market participants expect significant price fluctuations in the future.
In this case, although the cost of using the Straddle strategy is high, if investors believe that actual market volatility will exceed current expectations, they can also use the Straddle strategy.

Consolidation breakout

The consolidation period in the cryptocurrency market may indicate an upcoming significant volatility. In this case, the Straddle strategy can be set before the price breaks out of the trading range, allowing for profit when significant volatility occurs.

How to better use the Straddle strategy

Trend analysis

Understanding whether the current market is in a bull market, bear market, or consolidation market, the Straddle strategy may not be as effective in a consolidation market.

Technical analysis

Use charts and technical indicators to predict the possible direction and magnitude of market movements. Technical analysis can help you find points in time when volatility might increase, thus better selecting the timing to enter the Straddle strategy.

Fundamental analysis

Research the fundamental factors affecting the market, such as policy changes, economic data releases, corporate earnings reports, etc. Fundamental analysis can help you identify events that may trigger significant market volatility.

Focus on market volatility

Closely monitor the overall volatility indicators of the cryptocurrency market, such as historical volatility and implied volatility, which can provide you with clues about market sentiment and potential volatility.

Maintain discipline

The Straddle strategy is a higher-cost operation and requires a higher degree of volatility,
Caution should be exercised when using the Straddle strategy to avoid frequent trading, as this increases costs and weakens potential returns.

At the same time, avoid emotionally driven excess (emotion-driven) operations.
Even if market volatility is high, the Straddle strategy should be implemented based on a pre-established plan and analysis.
This strategy is more likely to be profitable when the market outlook is unclear and driven by volatility.

Cost control

When implied volatility is high, the available leverage is lower, and the premium amount will be higher,
At this time, using the Straddle strategy, the break-even range will be larger, and the strategy cost will also be higher.
Consider using the Straddle strategy when premiums are low, which can reduce costs and increase profit margins.