Straddles, are they ever profitable?
- Thread starter TradeCat
- Start date
Both structures are flat delta and you end up paying same amount of premium... but somehow Bobby is doing better then Jimmy.
Basically Not!
Besides the combinations of linear vs nonlinear curves:
1. Trading 100d would naturally risk almost double against trading 50d. Double its gain as well!
2. Buying 2 near ATM puts with long stock would be usually also more expensive than 1x near ATM call plus 1x near ATM put.
3. Closing a futures position would be better than closing ITM options. Considering both liquidity and spread.
4. Also fairly importantly, the nonlinear impact/dynamics of changing IV for options! The futures in synthetics sometimes can lose much more than straddle, when the value of options (for protection/hedging) lose too much of IV!
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Wonderbra! Put call parity takes care of it - you pay the same premium so you get the same costs and benefits.
The only possible differences are idiosyncratic to your local institution - i.e. if your funding or borrow treatment is different from the rest of the market place. I, for example, have worked at a bank where I'd get credit for funding generated by shorting stock - so needless to say, I would always be long calls and short stock when I wanted to be long gamma and short puts and short stock when I wanted to be short gamma.
The only possible differences are idiosyncratic to your local institution - i.e. if your funding or borrow treatment is different from the rest of the market place. I, for example, have worked at a bank where I'd get credit for funding generated by shorting stock - so needless to say, I would always be long calls and short stock when I wanted to be long gamma and short puts and short stock when I wanted to be short gamma.
Wow. This thread has devolved into one of the most ignorant options threads. Only botpros threads are worse.
I second that and deeply regret to having posted earlier. It is outright painful to read some of the posts here. Guys, please pick up a basic options text book. It's ridiculous to, for example, claim that risk and payoff are identical between two investments just because their initial premia are. Are the risks of an options strategy the same that costs 50 dollars and a UPS overnight package that may also cost 50 dollars? Come on, you guys can do better than that.
wow, many misconceptions here...
a put and a call on the same strike are basically the same...
1 ATM put has half the greeks of 1 straddle....
so yeah, +100 stocks + 2 ATM puts is the same as a straddle....
for every strike:
+1C -1P = synth long stock
-1C +1P = synth short stock
for ATM (delta 50)
+1C +1P = stradlle
+1C - 100 stocks = +1P
+1P + 100 stocks = +1C
+1P + 50 stocks = +1C - 50 stocks = + half straddle
+2P + 100 stocks = +2C - 100 stocks = +1 straddle
for ITM (say delta 80 call)
+1C (delta80) - 100 stocks = +1P (delta20), both same strike
+1P (delta 20) + 100 stocks = +1C delta 80, both same strike
You don't have to 'papertrade' it... just draw/calculate the payoffs
a put and a call on the same strike are basically the same...
1 ATM put has half the greeks of 1 straddle....
so yeah, +100 stocks + 2 ATM puts is the same as a straddle....
for every strike:
+1C -1P = synth long stock
-1C +1P = synth short stock
for ATM (delta 50)
+1C +1P = stradlle
+1C - 100 stocks = +1P
+1P + 100 stocks = +1C
+1P + 50 stocks = +1C - 50 stocks = + half straddle
+2P + 100 stocks = +2C - 100 stocks = +1 straddle
for ITM (say delta 80 call)
+1C (delta80) - 100 stocks = +1P (delta20), both same strike
+1P (delta 20) + 100 stocks = +1C delta 80, both same strike
You don't have to 'papertrade' it... just draw/calculate the payoffs
I think SLE meant the premium on top of intrinsic value... in which case he is 100% right.
But indeed... a basic options text book to study up on put call parity etc would be a good idea for some in this thread...