Scalping within a long straddle

D

Div Poacher

I seem to have better luck trading underlying than options, (although I have written plenty that expired worthless). I was trying to think of a strategy that uses options "as intended" -- a hedge, not as a profit-making strategy.

Let's see if my logic on this works.

Buy a long call and a long put, both ITM for a long straddle. For example:

BGG April put 40, ask: 3.3
BGG April call 35, ask: 3.3

Therefore $6.6 to set up the straddle, which is $1.6 for "the priveledge of having it".

Theoretically, if BGG goes above 40 + put premium, or below 35 - call premium, the straddle would be profitable.

But in reality, such a move within a month probably won't happen.... and you'll just end up spending the $1.6 to watch the price drift within the strikes.

But $1.6 is not all that much to earn scalping the underlying. That's only 10 moves of 16 cents. Or 10 short-and-reverse moves of 8 cents each.

While someone certainly could just scalp the underlying in the first place, without spending any money for the straddle, I'm wondering if there is a "psychological advantage" here. That you can take positions without concern of making a hasty exit, getting fooled on a "spike".

After all, your maximum loss is $1.6 even if the underlying makes a large move against you. If it's "easier" to trade profitably, by being mentally calm about the position, then it might be "worth" spending the premiums to set it up.
 
Quote from Div Poacher:

I seem to have better luck trading underlying than options, (although I have written plenty that expired worthless). I was trying to think of a strategy that uses options "as intended" -- a hedge, not as a profit-making strategy.

Let's see if my logic on this works.

Buy a long call and a long put, both ITM for a long straddle. For example:

BGG April put 40, ask: 3.3
BGG April call 35, ask: 3.3

Therefore $6.6 to set up the straddle, which is $1.6 for "the priveledge of having it".

Theoretically, if BGG goes above 40 + put premium, or below 35 - call premium, the straddle would be profitable.

But in reality, such a move within a month probably won't happen.... and you'll just end up spending the $1.6 to watch the price drift within the strikes.

But $1.6 is not all that much to earn scalping the underlying. That's only 10 moves of 16 cents. Or 10 short-and-reverse moves of 8 cents each.

While someone certainly could just scalp the underlying in the first place, without spending any money for the straddle, I'm wondering if there is a "psychological advantage" here. That you can take positions without concern of making a hasty exit, getting fooled on a "spike".

After all, your maximum loss is $1.6 even if the underlying makes a large move against you. If it's "easier" to trade profitably, by being mentally calm about the position, then it might be "worth" spending the premiums to set it up.
More...

I have occasionally had similar thoughts. I never did it, somehow when I think it through, it never really looks too smart to buy those options.
 
Div; what you have described is a strangle rather than a straddle. A straddle requires both options at the same strike. Also to get break even points you need to add the TOTAL premium (6.6) to the call and subtract TOTAL premium from the put.

Perhaps the following might interest you> Lets say you usually trade 200 shares of the underlying XYZ. Buy a longer dated STRADDLE ATM. Now you are free to go long or short the underlying and be protected on both sides by the options e.g> long underlying you are protected by the put, short underlying you are coverd by the call.

Is this the type of thing you're talking about ? Just remember that you have time decay running against you on both legs so a leap straddle might be advisable.
 
Looks like I have some learning to do about terminology.

Yes, that's the idea. Focus on trading the underlying (without risk) both long and short. Goal being to scalp enough times to overcome the cost of the option premiums. After the premiums are paid for.... anything else you can make is gravy!

When a trade goes against me, it seems that I could close that side of the option hedge via exercise. I would still be able to trade the other side with minimal risk, until it goes against me too.

At least, that seems the advantage in strangling long. It ties up more cash than buying both options at the same strike. But it's more likely for the underlying to remain in-the-money for your hedges.

For this strategy to work, I think the underlying should be relatively nontrending, but volatile enough to scalp the spread. (But with enough open interest in the options to hopefully obtain them within their spread.)

Scanning my charts, it seems like BUD, SPLS, or MEDI might work. Daily volume of the underlying in the millions, with open interest of the options into the thousands. Underlying price not really going anywhere.
 
There is considerably more risk here than you are thinking. For example using your numbers, if you purchase the strangle at 6.60, then purchase the underlying at 38 for a scalp which heads down past 35 and stays there, you can potentially lose 6.60 - [40 (put strike) - 38 (purchase price)] = -4.60. Pretty high risk for an .06. Insurance like lunch is seldom free.
 
Why trade options for direction if you do better with the underlying? To be honest, it doesn't sound like you understand the instrument very well at all. A position consisting of solely long options is a poor choice, imho, unless iit is for purely a single direction. Your idea sounds great, but, where do you place your stock trades? How do you deal with false deltas? Things to think about.
 
It took me a while to realize what you're saying. I had gotten myself into thinking the maximum loss was $1.6.

But now I see your point. If you're long the underlying and it drops, protected by the increasing value of the put, you're still losing equal value of the ITM call while you hold the stock. There is not "real" insurance.
 
Quote from white17:

Div; what you have described is a strangle rather than a straddle. A straddle requires both options at the same strike. Also to get break even points you need to add the TOTAL premium (6.6) to the call and subtract TOTAL premium from the put.

Perhaps the following might interest you> Lets say you usually trade 200 shares of the underlying XYZ. Buy a longer dated STRADDLE ATM. Now you are free to go long or short the underlying and be protected on both sides by the options e.g> long underlying you are protected by the put, short underlying you are coverd by the call.

Is this the type of thing you're talking about ? Just remember that you have time decay running against you on both legs so a leap straddle might be advisable.
More...
I thought the exact same thing, but after re-reading it to make a post similar to yours, I realized that straddle was really the correct way to describe what he's doing.

In a strangle, both options are OTM. But that's not the case here.

In his trade, both options are ITM, hence the put is 5 points HIGHER than the call. (If it were 5 points lower than the call, we'd have our classic strangle.)

He's doing, like he said, a strangle with TWO ITM options. Now why he chose that route instead of a two ATM options or a classic strangle (like you suggested :) ) I'm not really sure. I think either would be much cheaper and more applicable for what he's trying to do. With whatever strategy he chooses, he has to look at the delta of the legs. A leg comprised of an ATM front month option will have a higher delta than one of an OTM LEAP. So the amount of protection will vary according to which strategy uses and how many contracts he buys (obvious, I know :) ).
 
I guess I was just doing my best to figure out how to give the option writers my money :D

Seriously, though, I can see the utility of a long STRADDLE. That does give you protection to trade the underlying at all prices, although you are only protected trading short above the strike, and trading long below the strike.

Although it seems to me, for the expense of setting it up, maybe it's better to just buy and trade one side of it.

Bleah! No matter how you slice it, options are expensive toys.
 
Div,
Maybe an iron butterfly would work for you. Using MEDI this morning at 31.56 as an example, sell the April 32.50 calls and puts and buy the April 35 calls and April 30 puts for a 1.55 credit.

Some hedge there, and you can buy back some short calls/ puts as the stock goes lower/higher, or add to the position as the calls/puts are cheaper.

Threading the needle while on horseback?
 
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