straddle breakeven's

[erasmus]

if you have a 1mth straddle you can easily get the breakeven points. You can see what movement in the underlying stock/exchange rate/etc. you need in order to break even, so you could divide that by say 24 trading days (1 month) to see on average the daily movement required to break even.

Now what about the imp vol side of things. If the spot rate just sat there at the strike (i.e. the straddle was struck ATM), you'd be paying decay and eventually after 1 month ur option would be worth 0. So what jump in imp vol is needed to breakeven i.e. a "Break even imp vol" (is that what this term actually means)? Can you simply look at the BS formula and find the level of the imp vol that would give you twice the current option premium (so that if the IV increased to that new level just before expiry, your option position would be back to where you started at ) ?

And to add to that, you can get combinations of the two i.e. if IV rises by a bit, then the spot needs move somewhat less than earlier in order to break even? Any excel sheet/formulae to calculate this stuff?

 

[spindr0]

if you have a 1mth straddle you can easily get the breakeven points. You can see what movement in the underlying stock/exchange rate/etc. you need in order to break even, so you could divide that by say 24 trading days (1 month) to see on average the daily movement required to break even.

FWIW, there are 20 trading days per month, unless it's a 5 week expiration (ignoring holidays). I addition, time decay is non linear so "what movement in the underlying stock/exchange rate/etc. you need in order to break even" is going to vary.

Can you simply look at the BS formula and find the level of the imp vol that would give you twice the current option premium (so that if the IV increased to that new level just before expiry, your option position would be back to where you started at ) ?

Yes, you can do that but IV is verrry rarely going to increase that much.

And to add to that, you can get combinations of the two i.e. if IV rises by a bit, then the spot needs move somewhat less than earlier in order to break even? Any excel sheet/formulae to calculate this stuff?

That's a lot of effort to achieve breakeven trading. Wouldn't a simpe price alert let you know when that occurs? AFAIK, all of this is an exercise in futility. Or perhaps maybe just an academic exercise to stimulate the mind. How's it going to help you make money? I think it would be a lot more productive to spend the time trying to identify candidates that are going to move (evaluating the news) or finding under/over valued IV situations (skew) and placing better trades.

 

[TYtrader]

If the spot just sits there, you're probably not going to get a jump in IV.

Vega will help you figure out how much the option will increase or decrease in value for every point change in IV.

I know some traders that play the volatility rush ahead of earnings with straddles. I never have, but if you look at some stock options in the one or two weeks ahead of earnings, that might help you track some examples.

 

[erasmus]

Quote from spindr0:

FWIW, there are 20 trading days per month, unless it's a 5 week expiration (ignoring holidays). I addition, time decay is non linear so "what movement in the underlying stock/exchange rate/etc. you need in order to break even" is going to vary.

ok so in order to breakeven on "each day" you would need the spot movement to exactly offset the theta for that day, but overall cant we say if eg. we had the upper breakeven was 200 points away, then 200/20 = +10point average movement per day required to break even ?

and yes, this was more of a mental stimulation thing.

 

[erasmus]

My last post was correct right?


btw, does anyone know of a DerivaGem like excel spreadsheet that shows graphs and stats of the greeks for different spreads? (Deriva gem only does single options)

 

[dmo]

Quote from erasmus:


Can you simply look at the BS formula and find the level of the imp vol that would give you twice the current option premium (so that if the IV increased to that new level just before expiry, your option position would be back to where you started at ) ?

As has been pointed out, IV is unlikely to rise if the underlying just sits there. To answer your question anyway - ATM options increase in price approximately proportionally to an increase in IV. In other words, if ATM IV doubles, the price of the ATM options will approximately double too.

The further OTM you go, the more proportionally an option's price will rise with a rise in IV. In other words, if the IV of an OTM option doubles, its price will much more than double.

So the closer to the money you are, if IV rises, the MORE price will increase absolutely (in dollar terms), but the LESS it will increase as a percent of its current price.

As for the Excel sheet question - if you buy an Excel add-in function package such as Hoadley, you can easily set up an Excel spreadsheet to display greeks, prices, etc. any way you like.

 

[dmo]

Quote from erasmus:

ok so in order to breakeven on "each day" you would need the spot movement to exactly offset the theta for that day, but overall cant we say if eg. we had the upper breakeven was 200 points away, then 200/20 = +10point average movement per day required to break even ?

Only if the underlying moved in the same direction every day for 20 days straight - unlikely to say the least. Assuming that some days the underlying would be up and some days down, you would need much more than an average of 10 points per day average movement.

 

[4444CJones4444]

Quote from erasmus:



Now what about the imp vol side of things...So what jump in imp vol is needed to breakeven...

And to add to that, you can get combinations of the two i.e. if IV rises by a bit, then the spot needs move somewhat less than earlier in order to break even? Any excel sheet/formulae to calculate this stuff?

Sounds like you need to download the TOS platform. In the analyze tab, there is an input for Yield, Vol Adj, Stock Price and Exercise Price.

Also, you can input the volatility manually, and instead of entering the stock price manually, you can just click the current price on the graph and drag it back and forth to see how a move in the underlying will effect profit and how the greeks change with price movement.

 

[dagnyt]

Quote from erasmus:

if you have a 1mth straddle you can easily get the breakeven points.

Those B/E points represent holding the options through expiration. If you plan to do that, you are going to get crushed over the longer term.

You can see what movement in the underlying stock/exchange rate/etc. you need in order to break even, so you could divide that by say 24 trading days (1 month) to see on average the daily movement required to break even.

This is useless information.

Now what about the imp vol side of things. ...Can you simply look at the BS formula and find the level of the imp vol that would give you twice the current option premium?

Yes. A lot of effort for nothing. As was pointed out, you need a good sized move (preferably lower) to get a pop in IV. So if you get both of those, you 'should' have a profit. Upside profits are more difficult to earn.

Any excel sheet/formulae to calculate this stuff?

I understand your 'need' to play with the numbers. But, it's NOT going to help (as SPIN has already told you).

Buying straddles is a tough game and spending time worrying about how much daily move you need is not the answer. If you have no reason to anticipate a BIG move, don't buy straddles.

Mark

 

[erasmus]

Quote from dmo:

Only if the underlying moved in the same direction every day for 20 days straight - unlikely to say the least. Assuming that some days the underlying would be up and some days down, you would need much more than an average of 10 points per day average movement.

Well yes it would be unlikely for the underlying to move +10points a day for 20 days straight. But the idea is that overall we need to have a 200 point move in either direction over 10 days so as to break even. So some days we could have large moves, others large negative moves etc etc but the average move required per day is simply +10 points (or -10 points to breakeven at the lower breakeven point).