Trading Long Straddles

Quote from falconview:

A technical question. If are trading weeklies and trying to project where your trading vehicle will be in one week. I have had no problem while trading while the market was going sideways. But now we are in a BEAR TREND, I find it exceedingly difficult to project 7 days into the future. Other than the regression lines, in this down trend, I wind up with guesses all over the map. I´m wondering if anyone has a trick to doing this that works most of the time in a trend?
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Let me make this easy, my friend.
NO ONE CAN TELL WHAT THE MARKET WILL DO IN A WEEK, A MONTH, A YEAR, AN HOUR, OR EVEN 5 MINUTES. FORGET REGRESSION LINES, AND ALL OTHER JIBBERISH.

Sorry for the cap's but, come on, no one can ever predict anything for sure. We have to simply find what option classes are better than the others......very simple, right?

All the best,

Don
 
Thanks for the inpùt Don. :D

In another week I will be approaching my two years of trading options. One year was paper trading, the second year was trading with CASH.

I´ve been mulling over whether I want to go into a third year and if so, what approach to take. My account was $10,000 and I´ve ended up at $7000. So I´ve lost $3000 in the learning process. So I´ve lost 30%. I´m busy mulling over the lessons learned. I can write off the $3000 as it is cheaper than buying an outboard for the boat to go fishing. Educational and learning wise, it has been fun. The most difficult part is dealing with the wife.

I´ve learned a lot of things. Do I want to go on with this, and if so, in what format?
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Some conclusions: 1) The most profitable successful trading firms I know, make only 1 or 2 trades per year. Perhaps 3. They trade size.

2) The most successful trading method, for gambling addicts, is quick close and reverse, tape reading, ( or option chain watching ) learned by practise and becoming instinctive. Basically trend following. The bad part about this is the EXCHANGE RULE of minimum $25,000 to do day trading. By forcing small retail traders, to hold overnight, they are simply treating trading by small retail traders like you would slot machine gamblers. The EDGE is with the CASINO EXCHANGES. Or Sunday BINGO players on Indian Reservations. You can recognize a trend pattern and play it, but trends are not predictable for duration and length, or strength. You have to be in and out, as there are many false starts. Apparently somebody ran the numbers and a few day traders were making oodles of dough regularly on small accounts. They had to change the ODDS in pattern trading.

3) There are repeatable spread strategy methods that work most of the time, under certain market conditions. If you trade these, then SIZE again becomes important. You need size to make a living off it. Size means compounding. If you don´t compound then you are basically a quarter in the slot machine, type player. A gambling addict.

4) Which brings us to the HIGH RISK HEDGE FUND idea. Whether by an individual, family funds, or with a few clients. I may be wrong, but I have formed this impression. HEDGE FUNDS expect to eventually to run into a streak of bad luck, or their gambling run peters out. Then they go broke. The way I understand it, you set up an account with say $100,000, or more. At the end of each month, you take off the profit if there is any. If you have clients, you take your 20% of the monthly winnings. A losing month would pay you nothing. Either way the client is forced by agreement to take his or her funds in excess of the original starting account, out of the business, end of month. The gamble then becomes, how long you can use a pattern, or spread strategy and trade it successfully, week after week, or month after month, compounding your bet sizes, according to a formula based on the available account size. You could bet 50% of the account intra- month. Or say 100% of the account. This is compounding. You can double the total account money if you run into a streak of luck, in 5 months. You have to pay the IRS 40% of year end profits so you would need slightly less than a year to double your money as net profit. There are some spread trading methods that even do better than this. The bad part is a BLACK SWAN event will wipe you out. Then you must start over. If you were able to run over a year, your clients would come back.
The question then is, how to deal with a Black Swan dive event and could you, devise a way of closing out early? Haven´t got there yet!
 
Well I´m mulling over my choices. First off, I´m cleaning this beach apartment, doing some carpentry repairs and getting ready to leave after 4 months here for my health. Going back home.

I´m waiting for some feedback, from a new friend and it looks like I may have my new strategy worked out? Pending a few questions and points I would like clarified. But I expect I will probably trade next week. Not likely this week, though maybe? Got some packing and travelling to do and to finish up the stuff around here in cleanup mode.

I expect I will go back into STRADDLES with a twist and conversion in light of some new information I have. We will then see how it goes.
 
Quote from falconview:

Well I´m mulling over my choices. First off, I´m cleaning this beach apartment, doing some carpentry repairs and getting ready to leave after 4 months here for my health. Going back home.

I´m waiting for some feedback, from a new friend and it looks like I may have my new strategy worked out? Pending a few questions and points I would like clarified. But I expect I will probably trade next week. Not likely this week, though maybe? Got some packing and travelling to do and to finish up the stuff around here in cleanup mode.

I expect I will go back into STRADDLES with a twist and conversion in light of some new information I have. We will then see how it goes.
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Good luck in whatever choices you make. A couple of points. Your friends who trade 2 or 3 times per year are not trading firms, most likely funds using OPM, other people's money, and just trying to not lose much.

Your 10% loss was expected from having the idea that long options are a good thing.

There are no "secrets" - not from me, not from Atticus, not from anyone. Options are very simple and just need to be thought through.

All the best,

Don
 
Quote from falconview:

I expect I will go back into STRADDLES with a twist and conversion in light of some new information I have. We will then see how it goes.
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Straddles are tough to make money on. Go with butterflies or pick one direction and buy calls or puts.
 
Thankyou for the nice comments friend Don Bright

In a rather subjective review over two years. The straight option buyers did better than the option sellers. Admittedly, we didn´t get any kind of measuring returns from most sellers. The straight option buyers and these were small traders, who have no use for the amateur trading forums, were trading $5000, to $10,000 and even $30,000 in one case and were Washington, D.C. Federal employees with discretionary cash. They traded once or twice a year and favored stock companies in natural gas and coal. In one case also oil. All traded options on stocks using ONE YEAR and TWO YEAR LEAPS. They tried to pick the season for company profitable movement. Their returns over two years using their WHOLE ACCOUNT ( 100% ) was reported between 80% and 120% for the year. They were straight buyers and used LEAPS to avoid THETA decay. One guy and his wife just spent 4 days using my pull out sofa, at the beach apartment. He took his wife to see the progress on the second story, of their vacation house under construction out West here, across the Mopan River, white water rapids, from Xunantanich Mayan temple ruin. He has built this property over the last few years using his profits from his trading LEAPS and buying options.
The exception to the rule was Ryan Patrick trading Behavioral Trading on large swinging stocks on earnings reports. His return over six months was somewhere between 400% to 500%. This method requires an intimate knowledge of company stocks over perhaps 3 years earnings reports, to predict behavior. He was straight buying.
The best spread trading reported was 70% for a year on account. These were mainly sellers of options strategies. Most selling traders, were reluctant to report actual account balances. Sort of the temperature guage as an analogy, to measure cold or hot. Going by reports of individual trades on elite trader, spread traders as a group, did not perform well. This may be, because it is the nature of conservatism to limit losses, which also limits profits, using spreads. Profitable and losing trades fluctuated, but did not seem to indicate any sort of sustained revenue stream.
People consistantly using credit spreads and iron condors, seem to get wiped out once, or twice a year.
One player using LEAPS was trading multiple debit spread verticals, over a diversified stock portfolio, reported making money, but gave no percentage of account equity growth, so there is actually no way to judge this one.
Butterflies seemed a favorite of a number of players, this is a selling THETA strategy. In only one case was any sort of return reported, which was 70% for the year. The others seemed to win and lose in erratic, but rather equal amounts. Insufficient data on returns to judge this strategy.
Buyers of options seemed to do far better with fewer trades and long term LEAPS, than short term buyers acting on short term action. Based on the results of the equity curve over a year.
So what does a newbie, or novice like me get from this?
a) It is important to limit losses.
b) It is more important to trade much less frequently, but WIN. Choose your moment carefully.
c) The equity curve growth, if any, is the ultimate proof of trading competency and strategy choosing.
d) The winners, seemed to think that Elite Trader forums were counter productive to winning. Too much time spent on discussing intricacies of different strategies, which hid the fact that the most productive was straight buying and selling. This required TIMING. The promotors of selling strategies claimed better success than buying and selling. The actual results using equity growth, indicated LEAPS for buyers and few trades, but using all your account was a better productive dollar earner.

What will I do this next year if I trade. Change to far out months. At least nine months, maybe a one year leap. Trade less. Still working on that method.

One of the interesting debates was that between chartists and indicators, tape readers, and greek option traders. Many strategies of spreads used the greeks. My own opinion was that it did not matter much whether you used the greeks, or graphical charts and indicators. Tape reading was a seperate method and intuitive through practice, like learning to play a violin. Neither the greek method or the chart method forecast the future. They only reported where you were in the present and in some sense gave you a historical context. The future did not do what either method promised on any consistant basis.
 
STRADDLE TRADING REVIEW after two years.

I still like STRADDLES. You can get two trades a month out of STRADDLES earning a net profit of 3% each time, with little or no risk.

I did some experimenting and haven´t finished with this yet. To get more OMMPH! out of a STRADDLE as far as returns.

The method that works best is to let a STRADDLE run, fluctuating, until you get enough to make it worthwhile. In the QQQ the monthly bar was about 5 strikes and you needed a 3 strike move to get your profit. This is about the same as a Vertical Debit spread. The return was similar.

A couple of times I tried the 1/2 STRADDLE with success. In the half straddle trade, instead of closing the STRADDLE, you closed only the WINNING SIDE. Profit was much greater. This leaves you with a bunch of one sided options that are OTM and very cheap. The two times I had it so, I averaged down and eventually recovered the losing side at very small profit past breakeven.

I´ve done some thinking since then and come up with several alternatives of treating the pile of cheap OTM contracts left over. You need to break even on them, to keep the profit on the winning side you collected.

One method is to re-establish the straddle by buying back some options on the winning side you sold. Then go into DELTA NEUTRAL trading with the straddle. The second method was to average down and lower your break even point on the losing side. In averaging down, I played with Delta Neutral scenarios for calculation how to average down. ( the straddle may continue for a while in the same direction ) Ultimately I came up with a more accurate method of averaging down than delta neutral calculations. If your straddle started out with one contract, then after you have sold your winning side, you DOUBLE your contracts on the losing side, using the same STRIKE you started with. The trick was to double each strike, the momentum kept going the same way, per strike. So lets say you have 1 strike after you sold the winning side. You would then buy 2 contracts. Leaving you with 3 contracts. At the next strike in the same direction ( these options are getting cheaper as the direction trends ) You double again. In this example you buy cheaper same strike 6 contracts. If it moves down another strike you double again buying 12 contracts with very cheap options. Lowering your breakeven point on a rebound tremendously. In the QQQ the monthly bar is about 5 strikes in total and if you had sold the winning side, you probably would be at one extreme or other of the monthly bar. Since it takes 3 strikes on average, to get a winning side on the straddle. You might have to double twice, at the most 3 times? Never tried this as it never quite worked out that way. But the straddles paid off many increments of profit this way.
 
Mr. Falconview. Perhaps I am mis-reading you. You talk about "buying in short options" and yet you go into detail about buying long straddles. Am I missing something?

One method is to re-establish the straddle by buying back some options on the winning side you sold.

Are you now selling straddles instead of buying them? Or you're saying you want to buy first, then sell, then buy back? That's, well, kinda crazy and very costly don't you think? I know you had a tough year, that 30% loss and all, and was hoping you learned enough to know better.

you DOUBLE your contracts on the losing side

Doesn't seem like a good plan, IMO.

Don
 
To Don and diaooptions

Your comments are well taken. I dont find the straddle a bad performer at all. It is rather slow and doesn´t earn any more than a debit or credit spread. I have not experienced with my experimenting anything like losing money with a straddle. It is a very conservative strategy. It is not a trade suited for adrenaline junkies and action gamblers.
For entry you wait for congestion and when you have the ATM equal in value on both puts and calls, when the volatility is low, you place the straddle. Now I am not talking about quickie players here. You may make money in 3 days, it may take 3 weeks, but it will make money sometime during a month. It only has to move enough in either direction. A lot of players seem to think the straddle is a good one, for earnings reports placed before the report. Looking for the volatility move. I haven´t tried that yet, but it sounds good. Sounds like more possible trades that way. If Behavioral Traders were to use a straddle, they would make less, but be more secure. The only advantage to this that I can figure ( no experience yet ), is that you would certainly during earnings seasons, get more trades per month. More trades equate to more profits. Presuming you had a list of big swinging percentage wise stocks on earnings reports, like APPL.
I more think for conservative trading, presuming you would complete one straddle per month, ( 60 days or 90 days out ) you would earn 3% net profit after commissions and allowances for IRS taxes. This is hardly strenuous trading. No boring watching the computer, or adrenaline rush, or junkie slot machine type trading. You could even just use a tv monitor, watching CNBC ticker tape ( I´ve done that ) and be able to work your other job. On 3% that is 36% per year. If you got two straddles completed within one month ( dependent on market movement ) ( my only reference is indexes ) So you are looking at net of a 21% ROI per year. My testing base is small and only on indexes, but I don´t see anybody losing on a straddle, just taking time. As a conservative income earner, it is hard to beat. Now a lot of people trade a lot of things, but I wonder how many of the short time traders on elite trader are doing better than +36% a year? It´s the losses that kill them. Lets assume you were able to complete two straddles per month, you are talking an income stream of 20% to 40% per year, net profit. I´ve heard butterfly traders earn about 70% per year on account. Not sure if that is net or gross return.
I would think straight straddle trading and doing NOTHING else, would be a good return and better than the bank, particularly on indexes. You could sleep at night, and do your other job at the same time. It is the sort of trading, you would use 100% of your account, without messing with little trades, and the higher element of risk, as in churning. If you were managing money, it is a calmer way to go. You could offer your clients 20% return and pocket the rest. ( grin )

On the OOMPH! suggestions, I´ve only tried the averaging down. It works. Though I don´t in principal believe in averaging down. Not having actually sold a 1/2 straddle, the winning side and replaced it again, to renew the straddle, I can´t comment on that yet. It was an idea, to just keep the straddle running and do delta neutral trading, every 2 strikes or something. It is not self defeating. You just took out say $400 profit for your account and simply kick started the straddle yet again. Allowing the market to go either way. I did something like that just once, but was looking for lower volatility and premium and waited, and didn´t get it, and missed a further runaway move that would have paid more, going in the same direction. The lesson learned was to re-start the straddle and make both sides delta neutral for a fresh start. You would need less contracts on the winning side, you just collected your profit from.
 
Just re read Don Bright. The question was about shorting a straddle. The answer is NO.

Let us say you start a straddle with 15 contracts in puts and calls at a strike.

You get a good 4 strike move and have a pile of money on the winning side. If you close the Straddle, maybe you will make $70. If you just sell the winning side, you clear $400. The choice is yours, play it safe and take the lesser, or go for the bigger.

What I´ve learned is to take the bigger profit and re-start the straddle.
That means figuring the same original strike price using your now lonely losing 15 contracts that are way OTM and cheaper. Calculate the Delta and buy enough new, on the now zero balance side to equal your deltas. In practice for me that was holding OTM 15 contracts losers and then having to buy 8 contracts at the higher premium on the zero side, you cleaned out the larger profit. Giving me the old straddle at the old strike, BUT EQUAL DELTA. Except I now have 15 contracts in CALLS and 8 contracts in PUts. But equal DELTA. Or neutral .50 on both sides. I¨m not shorting anything.

Basically you are taking a bigger profit and restablishing the old straddle at the same strike with same delta on both sides. Continue to play the game with the straddle. You are just Delta Neutral trading, but not necessarily with the intention of closing the straddle as a complete trade yet. Depending on far out you were in days, or months for your trade, this could go on for a while. At least getting two more trades out of the existing straddle setup. If you wanted to bias the trade, when the monthly bar showed a bottom or top by other indicators, simply double up, those cheap OTM options, since the trend would probably be the other way.
 
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