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Option Trading: Buy or Sell Straddles in Altisource Residential Corporation (NYSE:RESI)




Altisource Residential Corporation (NYSE:RESI) : Trading Straddles

Date Published:

OPENING
As we look at Altisource Residential Corporation 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 short straddle will miss the fine points required -- especially surrounding earnings.



Option trading isn't about luck -- this four minute video will change your trading life forever: Option Trading and Truth


There's a broader question we are looking to answer -- has owning options or selling options been the winner in Altisource Residential Corporation (NYSE:RESI) .

STORY
There's lot less luck involved in successful option trading than some people have come to know. We'll get specific with short straddles on RESI. Let's look at a two-year back-test of a short 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 short straddle looking back at two-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.

RESULTS
If we did this short straddle in Altisource Residential Corporation (NYSE:RESI) over the last two-years but always skipped earnings we get these findings:

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

Gross Gain: $789
Gross Loss: -$675
Wins: 16 Losses: 8

Short Straddle Return:  20.5
Stock Return:  -10.2

Option Out-performance  30.7

First we note that the short straddle strategy actually produced a higher return than the stock 20.5% versus -10.2% or a 30.7% out-performance.

Selling a straddle every 30-days in RESI has been a pretty substantial winner over the last two-years returning  20.5%. Even better, the strategy has outperformed the short straddle that was held during earnings.

GOING FURTHER WITH ALTISOURCE RESIDENTIAL CORPORATION
That first step of analyzing a short 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 short the straddle two-days before earnings, then close the option position two-days after earnings.



Here are those results for the same short straddle:

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

Gross Gain: $70
Gross Loss: -$193
Wins: 4 Losses: 4

Short Straddle Return:  -27.3

Selling an uncovered straddle in Altisource Residential Corporation during earnings was not only a loser, more importantly, it returned less than the same short straddle that avoided earnings. But, there's 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 Altisource Residential Corporation and trading short straddles to something that makes a difference in our trading lives.