Option Trading: Buy or Sell Straddles in Fortress Biotech Inc (NASDAQ:FBIO)

Fortress Biotech Inc (NASDAQ:FBIO) : Trading Straddles

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As we look at Fortress Biotech Inc we note that deciding whether to buy or sell options (in this case a straddle) is probably the most important question when it comes to option trading. But a cursory analysis of a long straddle will miss the fine points required -- especially surrounding earnings.

There's a broader question we are looking to answer -- has owning options or selling options been the winner in Fortress Biotech Inc (NASDAQ:FBIO) .

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There's lot less luck involved in successful option trading than some people have come to know. We'll get specific with long straddles on FBIO. Let's look at a three-year back-test of a long straddle strategy with these quick guidelines:

* Test monthly options (roll the trade every 30-days).
* Avoid earnings.
* Examine the at the money straddles.
* Test a long straddle looking back at three-years of data.

We want to introduce how easy this is with the right tools but also how important it is to make sure you use them. Just tap the appropriate settings.

And now the findings.

If we did this long straddle in Fortress Biotech Inc (NASDAQ:FBIO) over the last three-years but always skipped earnings we get these findings:

long 50 Delta Straddle
* Trade Frequency: 30 Days
* Back-test length: three-years
* Always Avoid Earnings

Gross Gain: $988
Gross Loss: -$970
Wins: 16 Losses: 20

Long Straddle Return:  4.6
Stock Return:  -12.2

Option Out-performance  16.8

First we note that the long straddle strategy actually produced a higher return than the stock 4.6% versus -12.2% or a 16.8% out-performance.

Buying an uncovered straddle every 30-days in FBIO has been a modest winner over the last three-years returning  4.6%. But, as modest as the gains have been, this clever use of avoiding earnings has outperformed the long straddle that was held during earnings.

That first step of analyzing a long straddle while avoiding earnings is nice -- but let's go deeper.

Let's look at the same analysis, but we will only look at earnings. Specifically, we will long the straddle two-days before earnings, then close the option position two-days after earnings.

Here are those results for the same long straddle:

long 50 Delta Straddle
* Trade Frequency: 30 Days
* Back-test length: three-years
* Only Trade Earnings

Gross Gain: $110
Gross Loss: -$188
Wins: 4 Losses: 8

Long Straddle Return:  -21.4

While Buying an uncovered straddle in Fortress Biotech Inc was modestly positive, taking on extra risk by actually holding a long straddle position during earnings did worse. Yep, taking on more risk yielded worse returns. There's actually a bigger picture here.

Having historical analysis in hand before option trading maps the decision process about what to trade, when to trade, and even if the trade is worth it at all. Now let's go beyond Fortress Biotech Inc and trading long straddles to something that makes a difference in our trading lives.