Long strangled BigBand ... what next?

T

Threepw00d

Newbie here.

I long strangled BBND (closed at 21.43 today) with ten SEPT 17.5 puts at $1.09 and ten SEPT 25 calls at $1.41 (total cost, $2500). ThinkOrSwim's theoretical price with an after-market drop of -$2.87 and assuming volatility drop of 15% is $1.04 for the puts and $0.15 for the calls.

I'm considering holding out for the stock to drop more in regular trading hours, and then take whatever profits I can out of the puts (sell at $1.29 if I can). Then I plan to dollar-cost-average the calls when they hit rock-bottom ($0.05?) and hold till things look up (maybe a month or two). Does that sound reasonable or have I shot myself in the foot with a poorly executed strangle? Any help is greatly appreciated, I'm just trying to learn.

Thanks in advance :)
 
Well let's see, you are a "newbie" and you question whether your trade was "poorly executed" so I will assume you don't know much. You bought a strangle before earnings on a stock that just started trading so you have no way to know how it usually reacts to earnings, what IV does in relation to news, and no useful data on historical volatility of the stock. I would classify that as gambling not trading/investing.

You paid 2.50 and it closed 1.875 so you lost 25% of your money in a couple days, so apparently not a very good gamble. Now you are thinking about selling the Puts for a small profit and then risk the rest of your money on way OTM Calls and hope the stock goes up even though their first earnings release was bad. At this point you need to ask yourself why you are trading options, what are your goals, risk tolerances (hint: they are way too high), etc. and what your plan is for learning a lot more about them so can avoid throwing your money away.
 
You need more lead-time when buying straddles/strangles BEFORE earnings announcements. You're better off short-selling the same position the day before the news in order to profit from the expected volatility collapse. Live, learn, lose and then profit.
 
As you probably noticed, the strangle's value did not drop as much as TOS's model suggested. That's because the IV expansion and contraction hits the near month the most. Generally, 4+ months out isn't severely inflated unless there's something huge pending such as FDA ruling, lawsuits, etc.

Holding out for the stock to drop more is fine if you have firm belief that it's going down more. If it doesn't (or rises), you're going to find yourself b/t strikes in no man's land, watching it decay slowly and painfully. I'm not suggesting that you bail because I don't know squat about BBND. But I sure am familiar with the pain of hope. So perhaps, draw a line in the sand and at that point (mental stop loss), close the position when the loss exceeds it.

The idea of averaging by buying 5 cent calls is lottery like. They're selling for a nickel for a reason... eg., the odds are slim that they'll be worth something down the road.

Although the reply by Opt789 may have sounded a bit harsh, it was dead on. You were not fully prepared before you took this trade. I'd suggest learning as much as you can before trading. If you're going to trade, trade very small because the tuition is expensive.

And even when you are knowledgeable and prepared, you're still going to have losses. But maybe then, you won't have to ask strangers on the interent for advice which may or may not be viable :)
 
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