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

[OptionGuru]

Thank you for your support ET.



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Stay tuned. I will be posting a summary after the options expire this Friday, July 15.

 

[Cswim63]

Let me guess. The options must have been mispriced.

 

[samuel11]

Let me guess. The options must have been mispriced.

 

[OptionGuru]

Let me guess. The options must have been mispriced.

Yes. But over a much larger number of trades they wont be.

 

[OptionGuru]

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.

UPDATE - OPTION EXPIRY

• SPY closed at $215.83 ($0.57 over my estimate).
• Long ATM SPY 213.00 straddle profit $0.57.
• Short ATM SPY 213.00 straddle loss $0.57.
  
• GOOGL closed at $735.63 ($7.03 over my estimate).
• Long ATM GOOGL 717.50 straddle profit $7.03.
• Short ATM GOOGL 717.50 straddle loss $7.03.
• The P/L is based on mid-point for the open, and intrinsic value for the close. Actual profit would probably be lower, while the loss higher.

Even though the ATM straddles were profitable in this case over time both long and short straddles will end up being dead money and break-even. Not worth trading them.

 

[K-Pia]

IMHO. It's a zero sum game.
If it's played randomly & over an eternity,
Then one will end up with 0 minus costs -> Ruin.
However speculation is about tricks & timing.
Same for every zero sum game.

Does it sum up to : No Edge, No Gains ?

 

[OptionGuru]

IMHO. It's a zero sum game.
If it's played randomly & over an eternity,
Then one will end up with 0 minus costs -> Ruin.
However speculation is about tricks & timing.
Same for every zero sum game.

You can't win a zero sum game with no edge & over the long run.

Yes .....That is another way to describe Long and Short ATM Straddles.

 

[K-Pia]

Yes .....That is another way to describe Long and Short ATM Straddles.

Straddles could still be profitable if bought @low IV & sold @higher IV.
It's maybe less profitable than Naked Put. Or Call. Don't know.
I did not backtest but a priori ... They're all sucker games.
In the long run of course & played randomly.

 

[OptionGuru]

Question sent to me:

"Why doesn't your ATM straddle strike price change? 213.00 is no longer ATM, wouldn't it be 216.00?"

ATM, ITM OTM are terms to describe the current status of the options. The various option strikes will move in and out of ATM, ITM, OTM as the underlying moves. Today the ATM SPY Straddle is 216.00, last week it was 213.00.

 

[Martinghoul]

UPDATE - OPTION EXPIRY

• SPY closed at $215.83 ($0.57 over my estimate).
• Long ATM SPY 213.00 straddle profit $0.57.
• Short ATM SPY 213.00 straddle loss $0.57.
  
• GOOGL closed at $735.63 ($7.03 over my estimate).
• Long ATM GOOGL 717.50 straddle profit $7.03.
• Short ATM GOOGL 717.50 straddle loss $7.03.
• The P/L is based on mid-point for the open, and intrinsic value for the close. Actual profit would probably be lower, while the loss higher.

Even though the ATM straddles were profitable in this case over time both long and short straddles will end up being dead money and break-even. Not worth trading them.

So your claim was wrong, but yet you think you're right? You haven't even bothered to do some basic statistics, either. You're an option guru all right!

What was the point of this thread, again?