Long and Short ATM Straddles are Dead Money - But a very accurate indicator of future stock movement

[OptionGuru]

Long and Short ATM Straddles are Dead Money - But a very accurate indicator of future stock movement.

1. Options are very efficiently priced by the MM's.
2. MM's do not reward money to lazy traders who want an easy buck without having to bother with due diligence.
3. Easy money would be buying or selling the ATM straddle - unless due diligence suggests the options are mis-priced.
4. ATM Straddles are most likely to break-even by expiring at the top or bottom range of the straddle.
5. The underlying trading range for the life of the ATM Straddle will most likely be Option Strike plus and minus the ATM Straddle Debit/Premium.
6. The underlying will most likely close on option expiry day at Option Strike minus ATM Straddle Debit/Premium OR Option Strike plus ATM Straddle Debit/Premium.

EXAMPLES USING REAL QUOTES

• SPY at $212.65.
• July 15, 2016 SPY 213.00 Call $0.88.
• July 15, 2016 SPY 213.00 Put $1.38.
• ATM 213.00 straddle $2.26.
• SPY trading range until option expiry $210.74 to $215.26.
• SPY closes at about $210.74 OR $215.26 on July 15, 2016. Unless the options are mis-priced.
• Both long and short 213.00 straddles expire at about break-even.

• GOOGL at $717.78.
• July 15, 2016 GOOGL 717.50 Call $5.70.
• July 15, 2016 GOOGL 717.50 Put $5.40.
• ATM 717.50 straddle $11.10.
• GOOGL trading range until option expiry $706.40 to $728.60.
• GOOGL closes at about $706.40 OR $728.60 on July 15, 2016. Unless the options are mis-priced.
• Both long and short 717.50 straddles expire at about break-even.

Comments are welcome.

 

[K-Pia]

Indeed they are well priced 99% of the time.
I buy them when IV lays at historical low.
Then cross my fingers for a black swan.
Of course they ain't weekly options.
Actually it's more OTM strangles.

 

[samuel11]

Long story short - This Friday the SPY will close at $211.61 OR $208.39, give or take a dime.

LOL that is what you said last Wednesday. You were off by $1 (>40 bps). Not really a dime.

 

[J_Smith]

LOL that is what you said last Wednesday. You were off by $1 (>40 bps). Not really a dime.

Easy know you don't trade anyway

Now, why don't you "Feck Off" before I get out my bottle of Jack Daniel's

J_S

 

[J_Smith]

Long and Short ATM Straddles are Dead Money - But a very accurate indicator of future stock movement.

1. Options are very efficiently priced by the MM's.
2. MM's do not reward money to lazy traders who want an easy buck without having to bother with due diligence.
3. Easy money would be buying or selling the ATM straddle - unless due diligence suggests the options are mis-priced.
4. ATM Straddles are most likely to break-even by expiring at the top or bottom range of the straddle.
5. The underlying trading range for the life of the ATM Straddle will most likely be Option Strike plus and minus the ATM Straddle Debit/Premium.
6. The underlying will most likely close on option expiry day at Option Strike minus ATM Straddle Debit/Premium OR Option Strike plus ATM Straddle Debit/Premium.

EXAMPLES USING REAL QUOTES

• SPY at $212.65.
• July 15, 2016 SPY 213.00 Call $0.88.
• July 15, 2016 SPY 213.00 Put $1.38.
• ATM 213.00 straddle $2.26.
• SPY trading range until option expiry $210.74 to $215.26.
• SPY closes at about $210.74 OR $215.26 on July 15, 2016. Unless the options are mis-priced.
• Both long and short 213.00 straddles expire at about break-even.

• GOOGL at $717.78.
• July 15, 2016 GOOGL 717.50 Call $5.70.
• July 15, 2016 GOOGL 717.50 Put $5.40.
• ATM 717.50 straddle $11.10.
• GOOGL trading range until option expiry $706.40 to $728.60.
• GOOGL closes at about $706.40 OR $728.60 on July 15, 2016. Unless the options are mis-priced.
• Both long and short 717.50 straddles expire at about break-even.

Comments are welcome.

I will do the SPY one - if someone else want's to do the stock one, then go ahead.

J_S

Let's just keep an eye on this also

 

[OptionGuru]

Indeed they are well priced 99% of the time.
I buy them when IV lays at historical low.
Then cross my fingers for a black swan.
Of course they ain't weekly options.
Actually it's more OTM strangles.

I'm using the July 15, 2016 options as an example to get the final results quickly. My thread applies to all expiry dates.

LOL that is what you said last Wednesday. You were off by $1 (>40 bps). Not really a dime.

The MM's mis-priced the options - in the favor of the buyers. The buyers made about 50% return over two days, while the sellers lost 50%. Over time it will balance out making the Long and Short ATM Straddles not worth trading, but they are useful in determining what the MM's expect of the market.

I will do the SPY one - if someone else want's to do the stock one, then go ahead.

IMO ......... Option Open Interest and Volume will not provided any insight how the underlying will trade to expiry.

 

[vanzandt]

Thnx OG. I'm going to study this as it applies to NFLX and AAPL throughout the week.

 

[J_Smith]

I'm using the July 15, 2016 options as an example to get the final results quickly. My thread applies to all expiry dates.







The MM's mis-priced the options - in the favor of the buyers. The buyers made about 50% return over two days, while the sellers lost 50%. Over time it will balance out making the Long and Short ATM Straddles not worth trading, but they are useful in determining what the MM's expect of the market.




IMO ......... Option Open Interest and Volume will not provided any insight how the underlying will trade to expiry.

No harm in looking- let's see what Friday brings!

J_S

 

[sle]

Long and Short ATM Straddles are Dead Money - But a very accurate indicator of future stock movement.

1. Options are very efficiently priced by the MM's.
2. MM's do not reward money to lazy traders who want an easy buck without having to bother with due diligence.
3. Easy money would be buying or selling the ATM straddle - unless due diligence suggests the options are mis-priced.
4. ATM Straddles are most likely to break-even by expiring at the top or bottom range of the straddle.
5. The underlying trading range for the life of the ATM Straddle will most likely be Option Strike plus and minus the ATM Straddle Debit/Premium.
6. The underlying will most likely close on option expiry day at Option Strike minus ATM Straddle Debit/Premium OR Option Strike plus ATM Straddle Debit/Premium.

EXAMPLES USING REAL QUOTES

• SPY at $212.65.
• July 15, 2016 SPY 213.00 Call $0.88.
• July 15, 2016 SPY 213.00 Put $1.38.
• ATM 213.00 straddle $2.26.
• SPY trading range until option expiry $210.74 to $215.26.
• SPY closes at about $210.74 OR $215.26 on July 15, 2016. Unless the options are mis-priced.
• Both long and short 213.00 straddles expire at about break-even.

• GOOGL at $717.78.
• July 15, 2016 GOOGL 717.50 Call $5.70.
• July 15, 2016 GOOGL 717.50 Put $5.40.
• ATM 717.50 straddle $11.10.
• GOOGL trading range until option expiry $706.40 to $728.60.
• GOOGL closes at about $706.40 OR $728.60 on July 15, 2016. Unless the options are mis-priced.
• Both long and short 717.50 straddles expire at about break-even.

Comments are welcome.

Oh! Yes! Lets bet on two expiration buckets, OptionGuru. As I said before, if you are giving 50/50 odds on two 20-bp wide expiration buckets, I'll take the other side.

 

[2rosy]

you don't have to hold the straddle until expiration. and you don't have to hold short maturity straddles