question for stradle traders?

[sogodo]

Quote from jjk2:
so if the premiums are too expensive, but you still expect a huge price movement, would it be good to do a long strangle instead ? but this would mean that you are sort of guessing which way the prices would move by a big amount ?

probably, all we need to do is to compare not just historic and implied volatility, but impled volatility with itself.

even if something is 70% does not mean it cannot not spike to 120% in some conditions

by the way, VIX is way cheap.
some can expect it to be more expensive, looking at historic value

 

[JJacksET4]

I think maybe what jjk2 is trying to refer to that no one seems to be catching on to would be someone who bought a straddle before IV soared and the market tanked.

If you bought a straddle for Jan 09 on something like X or DRYS or POT, etc, etc. near their respective highs, you WOULD have a large profit if you were still holding them.

Much, if not all of the profit, however would be because of the movement in the underlying and not so much the IV.

Just to look at a quick example, X was $160 on July 31st. The IV at the time was approx. 60 according to ivolatility.com. If you bought a 160 straddle for Jan 09, it should have then cost about $5100 according to 888options.com calculator. The current quote on the put is now $12500 (of course, the call is worthless!).

Note that the put is valued completely based on the intrinsic value and the large IV increase the X and almost every stock has shown is no longer a factor 125 points in the money!

This is just one example, but yes, the original poster is correct in this way - anyone who bought straddles before the large IV increase (which was also before the large market fall) is probably doing pretty good with most stocks if they are still holding or sold recently.

Long straddles are successful when bought with low IV (which seems almost impossible now) and sold with high IV or after a large enough move (with or without IV increase). Not necessarily a good time to buy when IV is so high.

 

[forex-forex]

Quote from JJacksET4:
I think maybe what jjk2 is trying to refer to that no one seems to be catching on to would be someone who bought a straddle before IV soared and the market tanked.

Nope .... We understand what jjk2 - the OP - is asking. Take a closer look at his original post. I have it quoted below

have you bought a ferrari yet ?
i mean given the volatiliy of our markes, straddles would have worked magically ?
especially for finance and us indices.

He mentions the current volatility

 

[dmo]

Stories abound of premium sellers who steadily made millions over the last few years then lost it all and then some over the last month.

So far though I haven't heard about someone who doggedly bought straddles month after month, losing millions over the last few years, but stubbornly sticking to their strategy and finally coming out a big winner in the last month.

It would be a great story though.

 

[jjk2]

Quote from JJacksET4:

I think maybe what jjk2 is trying to refer to that no one seems to be catching on to would be someone who bought a straddle before IV soared and the market tanked.

If you bought a straddle for Jan 09 on something like X or DRYS or POT, etc, etc. near their respective highs, you WOULD have a large profit if you were still holding them.

Much, if not all of the profit, however would be because of the movement in the underlying and not so much the IV.

Just to look at a quick example, X was $160 on July 31st. The IV at the time was approx. 60 according to ivolatility.com. If you bought a 160 straddle for Jan 09, it should have then cost about $5100 according to 888options.com calculator. The current quote on the put is now $12500 (of course, the call is worthless!).

Note that the put is valued completely based on the intrinsic value and the large IV increase the X and almost every stock has shown is no longer a factor 125 points in the money!

This is just one example, but yes, the original poster is correct in this way - anyone who bought straddles before the large IV increase (which was also before the large market fall) is probably doing pretty good with most stocks if they are still holding or sold recently.

Long straddles are successful when bought with low IV (which seems almost impossible now) and sold with high IV or after a large enough move (with or without IV increase). Not necessarily a good time to buy when IV is so high.

yes. you've read my mind.

so i guess if you knew something big was happening (IV low, but i guess some other people knew this big event would be happening, so IV won't be insanely low ?), with straddles you would just be bullish on volatility not the direction of the market....

i think there is lot of uncertainty forecasting directions, so maybe speculating volatility is a much more consistent approach ?

 

[HooLee]

A triangle or coil is all you need.

Quote from jjk2:

yes. you've read my mind.

so i guess if you knew something big was happening (IV low, but i guess some other people knew this big event would be happening, so IV won't be insanely low ?), with straddles you would just be bullish on volatility not the direction of the market....

i think there is lot of uncertainty forecasting directions, so maybe speculating volatility is a much more consistent approach ?

 

[Grinder]

straddles are great if your 'harry hindsight'. Otherwise its a big head game, everything that is happening in the market is usually priced into the options, hence no free lunches. Unless you know something, but isnt that called 'insider trading'.

 

[JJacksET4]

jjk2,

I'm glad that you seemed to understand what I was saying. I think what you are saying is that new option traders often hear things like "Straddles are great if IV goes up" or something. Of course, like the previous poster said unless can see the future, IV can be hard to predict as well.

Straddles can be tougher to manage then they seem at first. I had a DE straddle on with 70 strikes back a while ago and when DE fell to about 54, I got out with a fairly small profit, because I was worried that maybe it would have an oversold bounce and go back to 60 or something and cause me a small loss. Instead, DE fell as low as 30 and I would have made 3-4 fold my money if I held till then. I made the mistake of taking the small gain instead of holding for the larger gain in this case. I also could have considered an adjustment, but I didn't - I don't make any excuses, I just flat out blew that one.

However, what happens with straddles often that can be frustrating is this:

Buy a 3 month 50 strike straddle for $700 - stock at $50.
Stock moves small first month - between $47-53.
End of 1 month - straddle - $550 - stock $51
next 2 weeks, stock goes to say $56. Straddle at $750 - person holds instead of taking minor gains.
stock falls back over next 3 weeks to $44 - straddle at $700 - person holds instead of getting out even.
with 2 weeks left - stock goes back to $48 - straddle now at $400 - person says "I can't sell now - stock is moving a bit and I'd hate to sell and have it fall $10 in one day"
stock falls to $45 with one week left - straddle $550 - buyer says "only 2 more bucks drop and I can sell"
stock goes to $49 - straddle $300 - "loss too big now, I can't sell"
stock goes to $53 - straddle $400 - "maybe it will make money on this side now".
2 days left - stock just goes to $54 - "I'm out " - sells for $475.
1 day left - stock goes to $60 - $1000 value.

In other words, straddles are hard to get rid of as they are losing value because you know you just need 1 big day to be profitable and the risks are limited, so you keep holding. However, each day you hold, time value drains more and more. So you are constantly in a struggle for making the right move. Each day that gets closer, you take a larger and larger risk that stock could move back to the strike and you could lose your entire investment, but the value you have already lost also goes up to the point where it may not make sense to sell anymore near expiration.

Of course, one way to fix this is to set absolute targets and stick to them - with straddles you might set a profit target and a certain time to close the straddle no matter what. Setting a target and sticking with it can be a different matter however.

Volatility is high now, but it has gone up over the last several months. What I have found is a lot of traders like doing short term straddles much more then longer term straddles. So, my guess is that alot of straddle buyers took some profits in Sept/early Oct and then felt straddles were now too expensive and haven't opened new ones yet. Just IMO.

Again, I would say that in general if someone bought straddles back months ago when IV was low (i.e. VIX <25) and the straddles haven't expired yet, they are probably doing well either through increased IV, or large stock movement or both.

JJacksET4

 

[dagnyt]

Quote from JJacksET4:

jjk2,

Straddles can be tougher to manage then they seem at first.

Agree.

But, the choice doesn't have to be hold or exit.

Trading delta neutral every time the stock moves five (or some other number) points. Sell one call on a rally. Sell one or two more if it goes higher. Sell one put on a decline etc.

I don't do that, but it is a rasonable strategy for a straddle owner.

Mark

 

[newguy05]

Quote from dmo:

So far though I haven't heard about someone who doggedly bought straddles month after month, losing millions over the last few years, but stubbornly sticking to their strategy and finally coming out a big winner in the last month.

It would be a great story though.

LOL dmo.

it's funny if you think about it, everyone is in agreement that naked put sellers pick up profit every month until they eventually blows up like this month. If that's the case, if you just buy naked puts and take losses each month wont you eventually make a killing one month and make it all back. Why isnt anyone doing that heh, human nature prevents such strategies?