Straddle trades

PetaDollar

PetaDollar

I hope to gain some experience and insight into straddle trades (simultaneous purchase of a put and call, same strike, same expiration) for both futures and stocks in this journal.

I hope it can be a joint journal (others can talk about their own trades). I don't plan on doing many of them, at least at first.

I'm considering a straddle of SLV (silver ETF) this morning. If you pull up a 1-year chart, you can see that silver's been moving quite a bit. I can imagine it headed up to test 50, or back down to 30. The way it's been moving, I can even say I wouldn't be surprise if it reached either of those two prices by this October. Hence the straddle.

I estimate an ATM put and call, Jan 12 expiration, would cost about $450 each for a total of ~$900. Extreme scenarios we may see by October:

(1) SLV @ 50: C + P ~ $1225 + $70 = $1295. +$395
(2) SLV unchanged (~40): C + P ~ 2 x $310 = $620. -$280
(3) SLV @ 30: similar to case 1.

Exit plan is to get out no later than October (time stop) if no trend develops. Otherwise I will ride whatever minor trendline appears. If I get a good profit up front (first month) I will take partials. Profit taking is my psychological weakness. I'm too greedy. Thus, I will defer those decisions to my wife. :D

I estimated the prices by looking at the last traded prices yesterday. Will verify with fresh quotes here shortly. I estimated prices Jan 12 in October (3 mo. to expiration) by looking at Oct 11 options now.
 
Fills

Using "SMART" order routing on IB.
Put in LMT @ the bid, 5 contracts, Jan 12 SLV.
For the C is was 4.65
For the P it was 4.40

C's got a partial fill (4 ctcs), CBOE, and then the last ctc 5 min later.

P's had the market move away, to 4.45/4.55, so I changed my bid to 4.50 and got fill after a minute (NASDAQOM).

Summary:

Bought

5 Jan 12 SLV 40 C @ 4.65 = $2325

5 Jan 12 SLV 40 P @ 4.50 = $2250

Total price for the straddle: $4575

Thoughts

It's probably best to get into a straddle when the intraday price has settled down. Otherwise you could get stuck with only one leg while paying a high price for the other. Alternately, get in with MKT orders. I believe I made out this time saving about $100 or 2% with LMT orders. However, I think I just got lucky, and next time I will first ensure the intraday price is caught up in a range. I don't believe the intraday price is as critical as the intraday volatility when entering a straddle. You can't miss a good entry price, as when trading futures or stocks on one side.
 
Here is a visual representation of the trade. You can see if SLV continues to move as it has in the last year, this is going to work out well.

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Attachments

p.s.
SI FOP DEC 41 P/C is $3600/$3950 at the moment. I'm not sure how good an idea it is to get involved with FOP on such a big contract (margin is ~ $25k) with an electronic, discount broker, which is all I have, so I decided against it. Hopefully others can comment.
 
Open questions, for opening a straddle:

How does my arbitrarily-chosen tactic of buying ATM options compare to finding the best value among nearby strike prices, using Black-Scholes?

How does my arbitrarily-chosen tactic of buying expiration 6-months out, with a time-stop for the trade about halfway to expiration, compare to any other choices for time to expiration and time-stop?
 
Code: 
Date	        SLV	Calls	Price	Puts	Price	 Value 	         UPnL 
Entry	        40.2	5	4.65	5	4.50	 $4,575.00 	
7/27/2011	39.28	5	4.15	5	4.92	 $4,537.50 	 $(37.50)
7/28/2011	38.74	5	3.85	5	5.10	 $4,475.00 	 $(100.00)
7/29/2011	38.76	5	3.91	5	5.17	 $4,540.00 	 $(35.00)

In case anyone is wondering, the light lines are not prognostics of any sort; they just show the average ground price needs to go to cover to make the trade profitable by the end of October:

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Attachments

Code: 
Date	        SLV	Calls	Price	Puts	Price	 Value 	         UPnL 
------------------------------------------------------------------------------------
Entry	        40.20	5	4.65	5	4.50	 $4,575.00 	
7/27/2011	39.28	5	4.15	5	4.92	 $4,537.50 	 $(37.50)
7/28/2011	38.74	5	3.85	5	5.10	 $4,475.00 	 $(100.00)
7/29/2011	38.76	5	3.91	5	5.17	 $4,540.00 	 $(35.00)
8/1/2011	38.29	5	3.55	5	5.35	 $4,450.00 	 $(125.00)
8/2/2011	39.59	5	4.3	5	4.55	 $4,425.00 	 $(150.00)
8/3/2011	40.55	5	4.75	5	4.25	 $4,500.00 	 $(75.00)
8/4/2011	38.00	5	3.5	5	5.85	 $4,675.00 	 $100.00 
8/5/2011	37.32	5	3.45	5	6.15	 $4,800.00 	 $225.00

Some thoughts--- It would be nice to model the profit/loss zones and plot on the chart rather than guesstimate as I did. It would also be nice to run a simulation of the SLV price into the future (many replications) to estimate the probability of entering or leaving a profit zone.

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Attachments

UPnL doubled over the past few days, presumably due to an increase in volatility. Wife has commanded a 10% profit exit. Will look to unwind this position in the AM. I hadn't considered profiting this way when I opened the trade, but it seems like a good idea since it appeared seemingly out of nowhere, and could probably disappear just as easily.

I noticed today the price of the straddle (P + C) was bid between 9.3 and 9.95, while offered between 10.1 and 10.7. The spread fluctuated quite a bit and was huge (~1.0) near the announcement.
 
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