DRYS Long Straddle

U

urrterrible

I know very little about options but have been reading about them and tutorialing for 2 months.

I am sick of watching DRYS bounce all over the place and not making money off it and wondered a few things.


Say you wanted to construct a Long Straddle on DRYS to take advantage of a stock that is one of the most volatile stocks you can find.

----stock is currently at 15.28---
Buy 10 Feb 09 Call Strike at 15 for 2.85
Buy 10 Feb 09 Putt Strike at 15 for 2.85(apparently I am golfing lol 'putt')

So your downside is $5.70 x 1000=$5700

To be profitable at expiration you need the stock to go to either 9.30 or 20.70.

Here's my question:
The stock moves ~6% tomorrow for a $1 change.

Are you going to make money or lose money if you get out of this straddle right before 4pm?

---guessing here---
stock was at 16.58 Friday at close

If we constructed this long straddle last Friday just before close we would have used the $17.50 options b/c from what I have read you want to do this At the Money and this is closer to the price at end of day.

It would have cost you:
Call $2.45 Put $3.8 = $6.25

After Mondays obvious volatile day the premiums on these $17.5 options were:

Call $1.90 Put $4.90 =$6.8

So am I correct you made $0.55 per share which on 10 contracts would be $550.

So basically I guess to make money the price doesn't necessarily have to get to the strike price plus the total premium you pay, that would be just if you held til expiration?

Does this sound like a good plan for DRYS?

Thanks a lot for any help...

UT
 
A couple quick questions for you. DRYS IV is high, so a long straddle is expensive right now, no? With IV already high, is it more likely to go even higher or settle back down? Do you know how lower IV impact this trade?
 
Quote from urrterrible:

I know very little about options

That's all you need to know for right now. You are not yet ready to use real money.

but have been reading about them and tutorialing for 2 months.

Would you be ready to give a performance if you had been practicing piano for two months?

I am sick of watching DRYS bounce all over the place and not making money off it and wondered a few things.

Understandable. But, they don't give away money. Real risk of loss is part of the game.

Say you wanted to construct a Long Straddle on DRYS to take advantage of a stock that is one of the most volatile stocks you can find.

Everyone else knows just how volatile this stock is, and the options are priced accordingly. As CJones asked, do you have any idea how options are priced and what may happen to the prices of the options if the stock changes price, or holds steady for a day or two? It's as if you want to drive a car but don't realize there is a gas pedal.


So your downside is $5.70 x 1000=$5700

To be profitable at expiration you need the stock to go to either 9.30 or 20.70. .

If you plan to hold until expiration, hoping to see a gigantic move, you have vry little chance of success

Here's my question:
The stock moves ~6% tomorrow for a $1 change.

Are you going to make money or lose money if you. get out of this straddle right before 4pm?

You can anticipate a small profit - but that's just my guess. These options are priced largely on emotion. In other words, will the implied volatility (you'll have to make an effort to understand what that is) can change, resulting in a decent profit or a good sized loss. Stock movement is not necessarily sufficient.

Learn to use an option pricing model to give you a better guess as to the price options will be under certain conditions. It will be a guess.

So am I correct you made $0.55 per share which on 10 contracts would be $550..

If you make 55 cents on 10 straddles, yes, that's $50.

So basically I guess to make money the price doesn't necessarily have to get to the strike price plus the total premium you pay, that would be just if you held til expiration?

Glad to see you understand that part. You are right about this.

Does this sound like a good plan for DRYS?

Sounds like a good plan for DRYS. Sounds like a terrible plan for you.




Mark
http://blog.mdwoptions.com/options_for_rookies/
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Going forward, an accurate way to see what will happen will be to write down the prices of the options involved at different prices of DRYS. Make sure to notate the option's ask price if buying and the bid if selling.

You can get a rough idea of what happened in the past by getting historical prices from:

http://www.crimsonmind.com/options/HistoryData.aspx?se=08Jun-190.0

But keep in mind that closing prices aren't always reflective of actual performance since the last trade in the option doesn't always correlate in time with the closing price of the underlying plus last trade doesn't reflect bid/ask slippage.

It's a bit of work to do this but it's the kind of work you should be willing to do before putting your money at risk, in order to get a feel for how strategies perform.
 
Quote from 4444CJones4444:

A couple quick questions for you. DRYS IV is high, so a long straddle is expensive right now, no? With IV already high, is it more likely to go even higher or settle back down? Do you know how lower IV impact this trade?
More...

Cjones,

I do not know about IV yet. I will be looking into it though thankyou!


Dagnyt,

Thanks so much for reading my post and I learned from your responses. I will not be trading this straddle, I was just ranting a bit, but in a serious manner. I want to learn how these things work. I totally understand there are no freebies out there and that there is risk, but at some point you have to take a stand and make a trade based on your calculations you are correct. While I know very little about options, I still feel that this would be a good trade. If you constructed this trade before today you would have lost $90 it looks like and that is with DRYS closing close to the open which is way out of character. Thanks for your time and please smack me from time to time if you feel I need it!!!

Spindr0,

I will look at what you mentioned and I am very willing to learn before I trade….thanks..,
 
Quote from urrterrible:

I totally understand there are no freebies out there and that there is risk, but at some point you have to take a stand and make a trade based on your calculations.
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While I totally agree with the cautionary statements made by others, you are right that at some point you have to plunge in. My experience is that you don't really learn anything until you bet (and lose) real money. The mistake people make - and that Mark and others are trying to save you from - is to bet substantial money based on insufficient understanding.

My suggestion is to bet the minimum - one-lots if possible - fully expecting to lose money. You don't learn more from losing $10,000 than you do from losing $100.
 
Quote from dmo:

While I totally agree with the cautionary statements made by others, you are right that at some point you have to plunge in. My experience is that you don't really learn anything until you bet (and lose) real money. The mistake people make - and that Mark and others are trying to save you from - is to bet substantial money based on insufficient understanding.

My suggestion is to bet the minimum - one-lots if possible - fully expecting to lose money. You don't learn more from losing $10,000 than you do from losing $100.
More...

Sure. Start small. But I believe a new trader should give him/herself a better chance of being successful by having a good understanding of what one is doing before using real money.

But, as with many aspects of trading - what is better for one person is not better for another.

Mark
 
Thanks fellas!!!

I might tap your knowledge more in the future. My main focus is trading stocks, but I only trade the opening so I have plently of time to learn new stuff.

I really think you learn paper trading as well. And that is what I did on thinkorswim for this trade.

I will not trade options until I am much more experienced and understand the pricing which you spoke of.

----Can you download a program that allows you to price options given a price change you feel is coming?

This DRYS straddle is down 220$ on a $5700 investment or 3.86%.
Given that DRYS has been very uncharacteristic these last two days I think this is a small loss. If this stock does not move 6% tomorrow I will close the virtual position.


Thanks
 
urrterrible, that's the wrong way to look at straddles in my view. It's not about what the value is at expiration, nor do you hold it till expiration.

I have been playing with buying straddles almost exclusively since the lehman mess. This is how my thought process goes

1) The underlying must be ready for a big move,ie due to been at a critical technical level or breaking news (ie: when sp500 hit 900, or bac announced a 15 freaking billion writeoff due to ml etc..

2) Then construct the straddle (with at least 1 month till expiration) and look at the following:
- the total premium + current IV vs past. If the underlying is at $3 and the combo cost $2.5, it's probably not a good idea to get into it!
- the greeks: vega and delta. So you know exactly what the behavior of your straddle will be.

3) Set a profit target and a stop loss target
- profit target: for example, if the underlying is at $5, and there is strong resistence at 8 and support at 3. You calculate the approx price of the option around those levels. For me, this part is not a science i just set the target i am comfortable with. Dont be too greedy, remember if you are long straddle, theta is always against you. You get double wammy for both call+put.
- set stop loss target: This is very important, stop loss in this case is basically the # of days i will give, for this straddle to be profitable. If it doesnt move as expected, i exit the trade and take my theta and vega loss. My stop loss is usually 3 days, you dont need to hold it for a long time because going back to 1) when you enter the position you did it BECAUSE of the expectation of a big move, if it doesnt come then cut the loss.

This plan has been working very good for me in this market, i tried all sorts of complex option trades earlier with a lot higher risk and lower return.
 
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