Straddles and strangles are common trading strategies introduced in a lot of textbooks and are widely used for option market participants. However, to our knowledge, we might not know how these trades should be designed, which trades are preferable, and how they are constructed in practice. Thus, we want to apply and discuss straddles and strangles as our trading strategies to the practical market. In our research paper, focusing on the time value and finding some profitable strategies are the two important concepts of our straddles and strangles. Being a sell side to earn the time value is our main goal. Although we may take higher risk, time value decay is helpful for us. The research focuses on straddles and strangles by using historical data of TAIEX futures and options. We use the closing price and settlement price as our trading price from data period January 2005 to December 2010. We also compare two different situations, holding positions to maturity and early offset condition, to our straddles and strangles.
The findings show that the straddle strategies have positive earnings by holding positions to maturity, and 3 out of 4 strangle strategies have the same results. We can indeed earn the time value as a seller because time value decays quickly for the last seven days of the options contracts. After considering the early offset condition, the profitability of the ATM straddle and strangles become worse. We might easily fall into a trap in which the index futures price fluctuates greatly for a few days and comes back to the normal level on the settlement date. Therefore, we encounter loss due to selling low and buying high so that the trading performance is poor compared with the positions held to the end.

Key words: Straddle Strategy, Strangle Strategy, Time Value, Settlement, Early Offset, TAIEX Options, TAIEX Futures

Canina, L., & Figlewski, S. (1993). The Information Content of Implied Volatility. [Article]. Review of Financial Studies, 6(3), 659-681.
Chaput, J. S., & Ederington, L. H. (2002). Option Spread and Combination Trading. SSRN eLibrary. doi: 10.2139/ssrn.296036
Chaput, J. S., & Ederington, L. H. (2005). Volatility Trade Design. Journal of Futures Markets, 25(3), 243-279. doi: 10.1002/fut.20142
Chen, G.-Z. (2008). The Research on Taiex Options and Strategies. Master, Providence University, Taichung.
Chen, W.-K. (2010). Options: Theory, Practice, and Risk Management (Vol. Reprint). Taipei: BestWise.
Chiu, W.-C. (2005). Options Overview of Taiwan and Overseas Markets. Securities and Futures Monthly, 22.
Chou, M.-S. (2005). An Empirical Study on the trade strategy of TAIEX Options-An Example of each expiration month contract first day closing price until to the due settlement. Master, National Sun Yat-sen University, Kaohsiung.
Christensen, B. J., & Prabhala, N. R. (1998). The Relation Between Implied and Realized Volatility. Journal of Financial Economics, 50(2), 125-150. doi: Doi: 10.1016/s0304-405x(98)00034-8
Cohen, G. (2005). The Bible of Options Strategies : The Definitive Guide for Practical Trading Strategies (3 ed.): Pearson Education.
Cordier, J., & Gross, M. (2004). Selling the Strangle in FOREX Options. Futures, 33(15), 46-49.
Fleming, J. (1998). The Quality of Market Volatility Forecasts Implied by S&P 100 Index Option Prices. Journal of Empirical Finance, 5(4), 317-345. doi: Doi: 10.1016/s0927-5398(98)00002-4
Hsieh, M.-C. (2005). The Study and Evidence of TAIEX Options Trading Strategies. Master, National Chenchi, Taipei.
Jorion, P. (1995). Predicting Volatility in the Foreign Exchange Market. The Journal of Finance, 50(2), 507-528.
Lin, H.-C. (2004). Time Value of Covered Warrants in Taiwan Stock Market. Master, National Chengchi University, Taipei.
Simon, D. P. (2002). Implied Volatility Forecasts in the Grains Complex. Journal of Futures Markets, 22(10), 959-981. doi: 10.1002/fut.10042
Yang, H.-T. (2007). Study on Pre-Clearance Optimal Profit Strategies for Options On Taiwan Stock Index. Master, Ming Chuan University, Taipei.
Yates, L. (2003). High Performance Options Trading : Option Volatility & Pricing Strategies John Wiley & Sons.