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If I go long and short a stock simultaneously, with a 1:50 leverage, and place a stop loss on both for when a 10% loss is reached, isn't this the exact same principle as the long straddle strategy within options trading?

The only difference I can see is you may get both of your buy and sell positions wiped out if the market is volatile. If it isn't however, and the move is a large one up or down, one of your positions will hit the stop loss and close down whereas the other one will have the potential to recover that loss and then some.

Am I missing something?

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Based on what you wrote, you would be better off with no position to start, and then enter a buy stop 10% above the market, and a sell stop 10% below the market, both to open positions depending on which way the market moves. If the market doesn't move that 10%, you stay flat. However, a long option straddle position requires that the market moves significantly one way or the other just so you recover the premium that you paid for the straddle. If the market doesn't move, you will lose money on your straddle due to theta decay and a drop in volatility.

Alternatively, you could buy a strangle, with a call strike 10% out, and a put strike 10% out. The premiums would be much much lower, and these wculd take the place of the stop entries.

Personally, I would never buy a straddle, but I do sometimes sell them, especially when implied volatility is very high.

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  • Selling straddles is most definitely the way to go - find some overstated volatility – Joseph Zambrano Nov 17 '15 at 1:48
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A long straddle using equity would be more akin to buying a triple leveraged ETF and an inverse triple leveraged ETF, only because one side will approach zero while the other can theoretically increase to infinity, in a short time span before time decay hits in.

The reason your analogy fails is because the delta is 1.0 on both sides of your trade. At the money options, a necessary requirement for a straddle, have a delta of .5

There is an options strategy that uses in the money calls and puts with a delta closer to 1.0 to create an in the money strangle. I'm not sure if it is more similar to your strategy, an analogous options strategy would be better than yours as it would not share the potential for a margin call.

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  • Can you provide a few examples? I'm kind of new to options and have no idea what a delta is. – Umair Nov 12 '15 at 22:53
  • @Umair no. the foundation of your entire logic is flawed, there is nothing to add here, except for you to go learn about options and ask more relevant questions. – CQM Nov 15 '15 at 19:40
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    You're a fantastic teacher. – Umair Nov 15 '15 at 21:01
  • @Umair doesn't matter what the consensus is, this is the right answer, I can teach the intermediate and advanced stuff, you have to learn the intro level from someone else – CQM Nov 16 '15 at 0:53
  • Buying (or selling) a strangle where the call and the put are ITM is called a Guts Strangle. You can select any delta that you want. The Guts Strangle is synthetically equivalent and offers the same P&L as the traditional strangle using the same strikes. IOW selling a 40p/60c strangle is the same as selling a 40c/60p strangle. This can be verified with the Synthetic Triangle. Any way you cut it, it's just a strangle. – Bob Baerker Sep 13 '18 at 18:31
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Up until your strategy's money losing leg is stopped out, you have zero PnL, while a straddle has lost time value but may gain from price movements - all the PnL at that time you cannot capture with your strategy. Also stop loss cannot guarantee your price.

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