A Data-Driven Approach to Straddle Buying

By Lawrence G. McMillan

One of the primary volatility trading strategies we cover in The Daily Strategist Newsletter is straddle buying. This can be a complex topic, and while we can’t cover all its nuances here, we’ve explored it in greater detail in our previous article, The Straddle Buying Strategy. In short, we conduct extensive statistical and probability analyses, and only the straddle trades with the highest expected returns make our daily list of potential recommendations. This table typically includes several such opportunities.

The image above contains the straddle buying table from the 2/20/25 issue of The Daily Strategist – Volatility Report.

Each column heading is explained below:

• Symbol, Und Price: the underlying symbol and its closing price are shown.  Index symbols begin with the character $ and futures symbols begin with @.
• Straddle, Strd Price: the straddle being analyzed and its closing price.
• Days: the number of trading days remaining in the life of the straddle being analyzed.
• %ile of IV: the current percentile of the composite implied volatility of this underlying instrument.  This volatility must generally be in the 10th percentile or lower in order for the straddle to make the list.  Occasionally – during periods of expensive options – the threshold for %-ile might be raised to the 15th percentile.  These terms are explained here, briefly:
• Composite volatility: each day, all of the options implied volatilities on an underlying instrument are weighted by their trading volume and distance from the strike (at the money options get the most weight), to produce a single, weighted implied volatility for that entity.  This is then the composite volatility, and it is stored in a database for each underlying entity daily. 
• Percentile: the percentile of implied volatility is determined from the database of stored composite implied volatilities.  While the database may have hundreds, even thousands, of stored volatilities, we usually use only the last 600 data points in order to determine the percentile.
• 50: the amount by which the straddle price would change if the composite implied volatility of this underlying instrument returned to the 50th percentile in 30 days (while the stock price is unchanged).  So, the implied volatility used in order to compute 50 is the one right in the middle of the implied volatility distribution over the last 600 trading days –  where 50% of the volatilities stored in the database are higher and 50% are lower.
• Historic Movement: there are two figures under the historic movement heading:  
• Points: the percent of the time in the past that the underlying instrument has been able to make of move equal in points to the straddle price, in the allotted time.
• %: the percent of the time in the past that the underlying instrument has been able to make a percentage move equal to the current straddle price divided by the current underlying price, in the allotted time.
• Prob: the probability of the underlying ever touching one of the other of the breakeven points at any time during the life of the straddle.  This is an extremely important statistic.  It is determined by use of our Monte Carlo simulation for probabilities.  This same Monte Carlo Probability Calculator is a standalone product that can be purchased. This probability calculator is more sophisticated than the simple ones that merely give one the probability of the stock being at or beyond a target price at expiration.  In reality, a straddle owner will most likely make adjustments or take partial profits when the underlying reaches the breakeven point, whenever that may occur – not just at expiration.  Thus, this Monte Carlo probability is the more appropriate one for most applications – certainly for straddle buying.  (This probability must be at least 75% in order for the straddle to appear in this list.)

In summary, straddle buying is a sophisticated volatility trading strategy that requires careful analysis of statistical probabilities and market conditions. By focusing on key metrics such as implied volatility percentiles, historical movement probabilities, and Monte Carlo simulations, traders can identify the most promising straddle opportunities. The table provided in The Daily Strategist highlights only those straddle trades with the highest expected returns, ensuring a data-driven approach to navigating the complexities of the options market.

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