Straddle / Strangle questions

[TraderNewb]

Quote from kinggyppo

Your handle scares me a bit, I must say. I am not sure if you understand what these guys are talking about. Would you describe yourself as a new, intermediate, or advanced options player. What I am getting at is that options like futures are highly leveraged and time decay or theta is usually where a rookie can get burned if you are long. If you are long an at the money straddle time is your enemy as theta (think decay) will slowly erode.

Thanks, kinggyppo. About the handle, I've been trading stocks for a few years now and have gotten into options last year. I'm not that successfull in either so I still consider myself new. Recently, I got into straddles because I thought that the risk can be manged better since the stock can go up or down to make money. I've done 4 now, two profitable, two not profitable and just wanted to ask more questions about how I can be profitable more often.

Although I don't understand the greeks too much (like how they're calculated) I do understand that time decay is what can make you lose money the fastest. Also, after the company reports earnings, the volatility can go down too, which also makes the options price lower.

Do you trade straddles/strangles? If so, what do you look for in the stock ( I look for a consolidation pattern)? Also, when do you buy the options (how far from the earnings date)? And, what expiration do you look for?


Thanks

 

[kinggyppo]

Quote from kinggyppo:

Your handle scares me a bit, I must say. I am not sure if you understand what these guys are talking about. Would you describe yourself as a new, intermediate, or advanced options player. What I am getting at is that options like futures are highly leveraged and time decay or theta is usually where a rookie can get burned if you are long. If you are long an at the money straddle time is your enemy as theta (think decay) will slowly erode.

Lets look at RIMM today as we have a perfect example of a (potential) profitable long straddle. RIMM reported earnings after hours. Players line up on both sides long and short depending on their outlook. RIMM closed at $107.00. The $106.625 strike is close. Let's say you were going to buy a dec $106.625 07 straddle. You would pay roughly $10.20 or $1,020 cash for the straddle, that is buy call/ buy put. Earnings come and presto RIMM rockets up to close at $118.99. $118.99 less the strike of $106.62 is $12.37. Theoretically you should be able to close the straddle for $12.37 - $10.20 = $2.17 or $217 per straddle. Again this assumes that RIMM opens tomorrow where it closed, I am trying to keep this simple. I don't know exactly where the options will open and I don't know where RIMM will open. I find it is more rewarding to follow a real world example than a musty example from a book. I also find that looking at profit or loss graphs helpful. You are asking some good questions.


http://finance.yahoo.com/q/os?s=RIMM&m=2007-12-21

http://www.theoptionsguide.com/long-straddle.aspx

$15.05 was the print, doubt too many people got that.

 

[kinggyppo]

Quote from TraderNewb:

Thanks, kinggyppo. About the handle, I've been trading stocks for a few years now and have gotten into options last year. I'm not that successfull in either so I still consider myself new. Recently, I got into straddles because I thought that the risk can be manged better since the stock can go up or down to make money. I've done 4 now, two profitable, two not profitable and just wanted to ask more questions about how I can be profitable more often.

Although I don't understand the greeks too much (like how they're calculated) I do understand that time decay is what can make you lose money the fastest. Also, after the company reports earnings, the volatility can go down too, which also makes the options price lower.

Do you trade straddles/strangles? If so, what do you look for in the stock ( I look for a consolidation pattern)? Also, when do you buy the options (how far from the earnings date)? And, what expiration do you look for?


Thanks

I would recommend reading "trading options for a living" thread at least the first 20 or 30 pages. These guys really should charge for this information. The gist of the thread is that there is no inherent edge (advantage) in selling vs buying an option. Lucky for us retail folk there are sharks like Atticus who will swoop in on incorrect pricing and keep the markets relatively fair. As to your question, yes I do trade straddles sometimes and I understand the risk. I usually trade options intraday and rarely hold for a long period (theta decay is a great way to lose money). I trade options mostly directionally and spend alot of time watching the screens. For example, this morning RIMM opened way up but the longs have to cover and the news (the earnings) are already priced in. Therefore, my assumption is that the stock would give back a few points so long puts and out for some lunch money. How do I know this, hours and hours of screen time, you see patterns develop over time. I would recommend you watch the screens, markets, tape as much as you can and learn as much as you can. Read every thread here that interests you. There are some good traders on this board, when I first started if I liked a trader I would read his posts to see where he was coming from. There really is no shortcut. Even great traders lose a lot, just because something should happen doesn't mean it will especially in the markets. Risk management is to me the end all be all as you need to survive first and then work on being profitable. I would check out "ES journal" and "AHG" grail thread. Good trading to you, keep asking those hard questions.

 

[overspool]

Quote from forex-forex:

MSFT wasn't a "no brainer". For over five years it was stuck in a very tight trading range, until the last earning report. I don't think anybody expected such a large move from MSFT.

Personally I thought it was. Especially with Halo 3 sales, which leads to more x-box sales, which leads to more x-box live subscriptions, I thought it was pretty obvious they would raise guidance. Paired with the fact that tech was somewhere everyone was wanting to put their money because of the market conditions.

 

[kinggyppo]

Here is one of my favorite setups, a failure pattern and gap fill all in one. Enjoy.

 

[lar]

You should know your Greeks and your synthetics. I had an "aha moment when I understood the answer to this question. What is the diference between a straddle and a strangle? Ans. A Butterfly. Read Cottle. Read McMillian. Read Natenberg. Read Caplan. Read Johnston.

 

[TraderNewb]

Quote from lar:
You should know your Greeks and your synthetics. I had an "aha moment when I understood the answer to this question. What is the diference between a straddle and a strangle? Ans. A Butterfly. Read Cottle. Read McMillian. Read Natenberg. Read Caplan. Read Johnston.

Yea, I know I should really get to know about the greeks and how they can help out more. What books in particular do you suggest?

 

[Trendytrader]

I have an Options Trading question. I'm new to options but have basic level 200 understanding. I'm using Tradeking as my broker.

The question I have is what is the best way to buy say a straddle so as not to be raped by the market makers on the bid ask spread.

1: Leg in each side using market or limit order?

2: Place straddle order at market?

 

[jwcapital]

Depending on your broker, you would like to enter both trades simultaneously. My broker ( I trade Future options on the ES (emini S&P 500) does not allow simutaneous entry, for market orders on futures options are not permitted on Globex. So, I ahd to leg in. I shorted the lower premium leg first..once that order was filled, I legged into the higher premium trade. I actually got a better total premium than if I had simultaneous order capability.

 

[kinggyppo]

Quote from Trendytrader:

I have an Options Trading question. I'm new to options but have basic level 200 understanding. I'm using Tradeking as my broker.

The question I have is what is the best way to buy say a straddle so as not to be raped by the market makers on the bid ask spread.

1: Leg in each side using market or limit order?

2: Place straddle order at market?

#2 is probably your best way to get robbed, especially if you are doing an equity play like GE. You can call your broker and have them walk you thru it. They are discount so ask them what is the best way. You will rarely see pros use market orders unless there is massive movement under way or getting out of a large order. Buy straddles on liquid options and ones with lower volatility (search historical vols). Also, you can chop a leg if you get a big move, 300 dow point days are pretty common this year. Good trading.