𝗦𝗶𝗺𝘂𝗹𝗮𝘁𝗶𝗼𝗻 𝗼𝗳 (a sort of) 𝗦𝘁𝗿𝗮𝗱𝗱𝗹𝗶𝗻𝗴 𝗦𝘁𝗿𝗮𝘁𝗲𝗴𝘆

I am not an expert on using Excel (or Google Sheets) but I managed to put together a quick and dirty simulation of "straddling" strategy to see how it would perform.

𝗪𝗵𝗮𝘁 𝗶𝘀 𝗦𝘁𝗿𝗮𝗱𝗱𝗹𝗶𝗻𝗴?

To be clear, a straddling strategy is used with Options. You would buy a Call option and a Put Option on an asset at the same time. You would only do it if you expect the stock price to move significantly but don't have an opinion on whether it would go up or down. The amount you paid to buy the options is sunk cost and you would lose money unless the stock moves at least as much as the cost of the options. If the stock price moves more than this amount, you will make profit.

However, I noticed some people love to buy and sell the same asset on eToro. Frankly I did not understand what was the point of it. I though they are simply trying to avoid closing trades in a loss, which is a stupid idea. However, someone tried to explain to me that they are trying to achieve similar result as straddling.

𝗖𝗮𝗻 𝗦𝘁𝗿𝗮𝗱𝗱𝗹𝗶𝗻𝗴 𝘄𝗼𝗿𝗸 𝘄𝗶𝘁𝗵 𝘀𝘁𝗼𝗰𝗸𝘀?

The problem is that straddling, like it works in Options, doesn't translate to asset trading itself. When you buy a call or a put option, the potential for a loss is limited to the cost of the option. When you buy an stock, the maximum loss you can make is the price at which you bought the stock. Conversely, when you short a stock the maximum loss you can make is infinite!

So I hate to call this straddling, but I don't know a better name for this.

𝗧𝗵𝗲 𝗦𝗶𝗺𝘂𝗹𝗮𝘁𝗶𝗼𝗻

To see if this can work, I simulate a strategy where I buy and short the NSDQ100 everyday at the market opening. I set a Stop Loss and a Take Profit. I will only hold a position for a fixed period of time, after which I will close the trade. I have simulated daily fees for holding short and long positions as you might have these fees in leveraged trade.

𝗞𝗻𝗼𝘄𝗻 𝘀𝗵𝗼𝗿𝘁𝗰𝗼𝗺𝗶𝗻𝗴𝘀

There are some obvious shortcomings in things that I haven't simulated here. I have not really simulated leveraged trade, because the end result of simulating it would be just that the profit and loss will be multiplied by the leverage. The effect of the leverage fees can be modeled by setting the holding fees and it will only have a worse effect on the gains. I have also not simulated dividends to keep things simple and also because dividends would mostly cancel each other out or only have a worse effect on the gains because as you can see our short positions often close after timeout.

There is also a bit of a problem with weekends. I am not opening a trade on the weekend. However, I may be closing a trade on a weekend at the opening price of the coming Monday. This is a bit complicated to fix but doesn't affect the results much, and once again can only hurt the gains due to fees for holding longer.

𝗥𝗲𝘀𝘂𝗹𝘁𝘀

Now coming to the result of the experiment, I have played with the parameters and have not found a configuration where I can achieve a respectable return for the amount of risk this strategy contains.

Another obvious flaw with this simulation is that it buys and shorts everyday. There may be a strategy to decide when to open the long and short positions that can make this strategy work. It may be possible, but not plausible.

No one can predict the market in short term. To make the gains worth the effort, you'd have to use leverage. With leverage, the potential of loss will also increase. When using leverage you'd have to optimize for fees. You'd also have to optimize for dividends. All of this can be really tedious and prone to mistakes.

𝗖𝗼𝗻𝗰𝗹𝘂𝘀𝗶𝗼𝗻

If even one of you read this far, I am truly impressed. :-)

I welcome you to try the spread sheet for yourself. I think I configured it so that you can change the parameters but not mess with the rest of the sheet. You can also just create a copy for yourself and play with that instead.

I am eagerly looking forward to hearing your suggestions, ideas and opinions on this!

Thank you for reading.