I predict SPX to go up 5% or down 5%, can I benefit from this?

[iBelgium]

I'm new to options, but I'm already thinking about different strategies. Let's say, I predict the SPX to go up or down 5% in 3 months or less, is there a way to benefit from this?

So I don't know the direction of the market, so I'm going to buy a call and also a put option. The only thing I predict is that the SPX will have moved up or down for at least 5% in 3 months or less. Let's say the price is 2100 today, then I predict the price to be 2205 or 1995.

Now as for the option part:

1. should I buy a put and a call option for 22/07/2016 at the current SPX price of 2100 and watch my premium become more profitable
2. or should I buy a put option at 2205 and a call option at 1995 with expire date 22/07/2016 and watch my premium become more profitable?

Current option premium prices can be found here: http://www.cboe.com/delayedquote/quotetable.aspx

 

[lindq]

I'm new to options, but I'm already thinking about different strategies. Let's say, I predict the SPX to go up or down 5% in 3 months or less, is there a way to benefit from this?

No. Not unless you can call that move within a day or two, and it happens suddenly.

The odds of you making that precise prediction are the same as the odds that you will profit. Which is close to zero.

 

[nitro]

I'm new to options, but I'm already thinking about different strategies. Let's say, I predict the SPX to go up or down 5% in 3 months or less, is there a way to benefit from this?

So I don't know the direction of the market, so I'm going to buy a call and also a put option. The only thing I predict is that the SPX will have moved up or down for at least 5% in 3 months or less. Let's say the price is 2100 today, then I predict the price to be 2205 or 1995.

Now as for the option part:

1. should I buy a put and a call option for 22/07/2016 at the current SPX price of 2100 and watch my premium become more profitable
2. or should I buy a put option at 2205 and a call option at 1995 with expire date 22/07/2016 and watch my premium become more profitable?

Current option premium prices can be found here: http://www.cboe.com/delayedquote/quotetable.aspx

Compute the theta it will cost you to hold an ATM straddle for three months. Look at the IV and HV of current option prices and SPX and see if the three month expiry options are more or less fairly valued. If they are (which they almost certainly are with VIX at ~14, although look at the historical value of when HV was at 8 and where the SPX was), I am nearly certain using this back of the envelope calculation that you can make $$ in nearly every scenario that SPX moves 5% in three months.

105 handles loss in the SPX is going to send VIX to 20+. There is no way it is going to cost that much theta to hold a straddle for three months. Most option software has a "What If" scenario that would relatively easily model this.

 

[lindq]

I am nearly certain using this back of the envelope calculation that you can make $$ in nearly every scenario that SPX moves 5% in three months.

A 5% move over 90 days isn't going to make anybody money in a straddle.

A 5% move in a few days, possibly. But that is not the question the OP is asking.

 

[FCXoptions]

Buy a call and put near at the money, then sell a call and a put 5% away or at your estimated target. Should decrease your cost, help on theta, etc. won't get nearly as much selling 5% away but nonetheless.

Edit:
Just priced SPX, $75ish for a spread 100pts both ways at the money. Going to prove pretty difficult to make money on that. $7500 at risk for $2500 max profit...

 

[Handle123]

I'm new to options, but I'm already thinking about different strategies. Let's say, I predict the SPX to go up or down 5% in 3 months or less, is there a way to benefit from this?

So I don't know the direction of the market, so I'm going to buy a call and also a put option. The only thing I predict is that the SPX will have moved up or down for at least 5% in 3 months or less. Let's say the price is 2100 today, then I predict the price to be 2205 or 1995.

Now as for the option part:

1. should I buy a put and a call option for 22/07/2016 at the current SPX price of 2100 and watch my premium become more profitable
2. or should I buy a put option at 2205 and a call option at 1995 with expire date 22/07/2016 and watch my premium become more profitable?

Current option premium prices can be found here: http://www.cboe.com/delayedquote/quotetable.aspx

First off, am not trying to be mean.

You can't predict if the moon will be Full during the month and you certainly can't predict price movements. And what that means you need to back test like min of 300 to 3,000 sample size to get probabilities and more different tests to get stats the better. Rules and probabilities gets you into marketplace. And why don't you know direction? Tells me you don't know trend?

Asking questions best way to fine tune a method, but you don't know so much. You don't want to get in a habit you can predict anything as this gives the inner you thinking you can and encourage you to believe that you can and make many errors. You want to make sound decisions based on testing.

 

[OptionGuru]

I'm new to options, but I'm already thinking about different strategies. Let's say, I predict the SPX to go up or down 5% in 3 months or less, is there a way to benefit from this?

Yes .............

........... Get the quotes of the options and build your trade around your views of the underlying as stated in your OP. The trade could be:

• Long straddle/strangle
• Short straddle/strangle
• Iron Condor
• Debit Spreads

Exact option strikes and trade depends on the option premiums. If they are dirt cheap then you will be entering a long position - if they are very expensive you will be entering a short position.

Cheap and expensive is defined by: "SPX to go up or down 5% in 3 months or less" Which trade will be profitable under those conditions?


Your next step is checking the option quotes. Also check out options on SPY.

 

[Roberto Lopez]

When doing straddles and strangle the most important thing to be aware of is:
- What your daily time decay is to hold the position, but
- more importantly what the volatility levels are. If you are buying vol. on high levels and the market bounces, you can lose a lot of money unless you get a HUGE, HUGE move higher. It is these high vol levels that most traders use to sell premium (instead of buying it).

I hope this helps. There are a couple good books out there on straddles and strangles.

 

[bln]

Yes, with the Reverse Iron Butterfly position. It got lower breakeven points compared to the regular butterfly at the expense of capped profit potential. If it is viable on a 3 month period? it don't know, you have to test it out yourself.

Reverse Iron Butterfly

 

[murray t turtle]

No. Not unless you can call that move within a day or two, and it happens suddenly.

The odds of you making that precise prediction are the same as the odds that you will profit. Which is close to zero.

%%
True; but he maybe could profit when he found out he could NOT really predict........................................................................