How do I take advantage of this?

A

Achiever

I'd like to deploy an option strategy to take advantage of the tight range that the S&P index is currently experiencing. I don't know which way it's going to breakout or when it's going to happen.

All I know is that it's going to move out of the 960 - 1015 range sometime soon. What strategies can I use to take advantage of this imminent breakout? An example trade would be greatly appreciated. :)
 
If you think the S&P is going to break out of its 960-1015 range, you want to be long either a straddle (buying both the call and put at the same strike, same month) or long the strangle (buying both an out of the money call and put in the same month). Depending on how much you think the S&P will move, and how much you're willing to pay in premium, the strangle will obviously be much cheaper, but require a larger moving to pay off, while the straddle is much more expensive, but can still be profitable if you get a decent size move. Keep in mind that you don't have to buy the 960 put or 1015 call, (sometimes these strikes are not available), but you can buy something similar, aka 950 put, 1025 call. Again, if you think an underlying is gonna move, and you're not sure which way, the straddle or strangle are what you want to do. Hope this helps

Vega:D
 
You'll pay about $2100 to establish a long position of a September 960 put and 1015 call strangle.

Assume volatility remains unchanged, my simulation tells me this long strangle has a 30% chance to be profitable. If this trade turns out to be a winner, your average gain is about $2400.

The expectancy of the trade is a loss of $430. Most long positions has negative expectancy.

If volatility increases, which is what you are betting on, say by 5%, your winning chance is about 40%. And your expectancy and profitability will all improve. Good luck!

P.S. Please note the CBOE SPX option is European style.
 
you buy the at the money straddle and sell the out side wings of the spread. ie.

buy 985 call / buy 985 put

sell 1010 call / sell 960 put

you get the benefits of the straddle while reducing some of the costs. if you are sure that it will blow thought he wings then sell your car and just buy lots of straddles
 
Quote from ktm:

...or just mortgage the house, sell all the calls and puts you can and do a Brazilian straddle.
More...

I thought you needed to go long an airline ticket for that as well.

:D
 
That's another way to do it, of course you limit you max profit to $25 minus what you paid to put on position, but I guess that works too. If I remember correctly from a while back, didn't you used to be a broker at the CBOE--cracks me up that the position you recommended had the most options (and therefore most commissions), ahhhhhhhhhhh old habits die hard !!!!!!!!!!!!!!!

Just giving you a hard time, hope all is going well for you.

Vega:D
 
Quote from TGregg:



I thought you needed to go long an airline ticket for that as well.

:D
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You are correct. A one way ticket to Brazil departing about an hour after the exchange closes.
 
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