Long straddle

Quote from donahuedc:

What is confusing to me is that there are so many choices. Just for the s&p 500 you can trade options on ES, the index, the ETF, and the big futures contract that I know of. Maybe I missed some. Can anyone explain the advantages and disadvantages of trading each? I'm leaning towards ES since it is $50/point and since the tax treatment is like a futures for us U.S. traders. But I'm really not sure if this is the best contract to trade for me. MTE?
More...

You forgot XSP. :) It's a mini-SPX index (1/10th) similar to SPY, but while SPY options are like equity options, XSP options are index options.

I'm no tax expert, but aren't index options treated like futures as well?

The main advantage of options on futures (either ES or the big contract) is the SPAN margining which aids naked premium sellers.

The advantage of index/ETF options is their liquidity. I don't trade options on futures, but as far as I'm aware, index options still beat them when it comes to liquidity.

SPY options are physically-settled each expiration, index options are cash-settled and options on futures can be either, depending on whether they are the serial month or not.

Index options have weeklys.
 
Thanks MTE. I'm not a tax expert either, but I believe that the index options have the favorable tax treatment also. However, I don't think the options on ETF's qualify for futures type tax treatment.
Also, I don't think that you have to sell premium naked to benefit from span margining. But this advange may go away soon. If I understand correctly, stock (and probably indices?) will soon have span margining too.
 
Quote from donahuedc:

Thanks MTE. I'm not a tax expert either, but I believe that the index options have the favorable tax treatment also. However, I don't think the options on ETF's qualify for futures type tax treatment.
Also, I don't think that you have to sell premium naked to benefit from span margining. But this advange may go away soon. If I understand correctly, stock (and probably indices?) will soon have span margining too.
More...

The greatest benefit of SPAN over reg T is realized on naked shorts. Yeah, you're right, ETFs may not qualify for futs tax treatment.

Indeed, there's talk of introducing SPAN-type margining to stock/index options, which will reduce that advantage of options on futures.
 
Quote from xyannix:

If the stock is at 47 and you buy the 45 straddle you are in essence bullish.

If you buy the 50 straddle you are bearish.

Your other option is to buy a strangle which would be to buy the 45 put and the 50 call.

The reason most straddle "lose money" is because the breakeven point can be 10% away from the current price.

People like to buy straddles / strangles before earnings because they think it is a win win trade, but the volatility crunch kills you if there is no move.

The real purpose of buying a straddle or strangle is if you are betting on an increase in volatility. You have to make sure you are buying it when volatility is really low.

Hope that answers your question!
More...

Is it a good enough reason to buy straddle if you think the stock will make a bigger move than the total premium you pay, say you pay $4 for the straddle and you expect the stock move more than 5 pts?
 
No because if you buy it and the vol's are high...even if your right in direction if vol's go down you lose. Murray (sailingbeme) and his group did pretty well buying straddle's before earnings but they had very strict criteria before putting them on. He has since moved on to mostly diagonals (I think)
 
The people that run www.optionetics.com are into long straddles/strangles, that's one of their favorite strategies.

I think they buy 3 months to expiration on stocks that have made a big move recently, they then sell with one month to go. I don't know how successful they are though.
 
A529612-------Risking "4" to make "1" is a horrible trade-off with a long straddle position. You have to have more of a "home run" mentality than a "small ball" mentality when buying premium.
 
Does anyone know if there is any "official" time for options to begin trading each day?

I know I have been in options positions and had to sit the first 15 minutes of trading watching a big move in the underlying from the open until there was a B/A for the option?!?


Thanks
 
Quote from a529612:

But you are naked once the stock moves out of the "range", say a major announcement overnight and wipe out your account. [/QUOTE

Those who get wiped out from selling straddles (or having long stock) have taken on too much leverage.

What is less risky?

Selling two straddles on a stock, or buying two hundred shares of the same stock?

For most of the possible scenarios of what the stock will do, writing the straddle is the superior strategy, in terms of risk/reward standpoint.

Most of the time, buying straddles is a loser's game. It is death by 1000 cuts. It takes time, but it's death nonetheless.

BUT, if you can only afford to buy two hundred shares of a stock, one would be a fool to write more than two straddles.

The key reason why options in general have a bad rap is because it is easy to take on too much size relative to the account .

Those who sell teenies, sell bull put/bear call spreads ( "credit spreads"), and other "cheap gamma" strategies often take on too much size. At least with the straddle, you're not selling cheap gamma, since atm options are right in the middle of the gamma curve.
More...
 
Quote from smilingsynic:

Those who sell teenies, sell bull put/bear call spreads ( "credit spreads"), and other "cheap gamma" strategies often take on too much size. At least with the straddle, you're not selling cheap gamma, since atm options are right in the middle of the gamma curve. [/B]
More...

IMO there's nothing wrong with selling 'cheap gamma' OTMs, just be sure to go even further out and buy even more wings at that.
 
You must log in or register to reply here.
Back
Top