Trading Long Straddles

OOOOh man! My head is a whirl with trying to understand what is happening. Seems like this mechanical method is some sort of STRADDLE, Delta, Gamma Scalping strategy.

Just been reading up on it. Looked up my morning straddle and it still profitable on both CALLS AND PUTS. The IV in both is higher, which is why I guess?

Trying to put the relationship between DELTA, GAMMA and IV, plus the index action in both PUTS and CALLS is making my head really spin.

I think most of the time they are talking about buying and selling stock in the explanations, but in a LONG STRADDLE you do that by buying both Calls and PUTS. Which twists up the thinking of translating the explanations a bit.

I did jot down some relationships and this coming week, will watch the GAMMA and the DELTA at the same time and probably the IV.

Gamma is the speed of the rate of change of DELTA as I understand it. The GAMMA of the index, or the PUT or CALL would be lower, when IV is higher and the GAMMA would be higher if the IV of the PUT or CALL in the long straddle. Not sure how this relates to the individual DELTA of the PUT or CALL yet.

However, when they suggest Delta neutral, they are talking of buying more Puts or CALLS as needed to balance the DELTA by adding the values together in the Long Straddle.

Going to take some more thinking about this in relationship to the Long Straddle composed of both Calls and Puts.

From the example today, IV has been rising due to a little flurry of market activity, though the Long STRADDLE went up a while and then dropped back to the beginning. This effect of IV lag on the STRADDLE means both sides of the straddle are higher premiums. I could cash them out and take a profit already. I dont understand why that happened?
 
falconview ...... use Yahoo Finance and setup a portfolio for paper trades and stocks to watch, the Bid/Ask quotes are right on. The live QQQ 55C/54P straddle I have opened has a value of $33.50 in my IB account, and $34.00 in my Yahoo Finance Open Trades portfolio. I prefer to track my trades with Yahoo Finance instead of logging in to my IB account.

Two paper trades to compare with my QQQ straddle. Quotes are at close of market today:
  • GLD @ $148.97
  • Buy 148 Put @ $0.34
  • Buy 149 Call @ $0.66
  • Total debt $100.00, no commissions.
  • GOOG @ $500.37
  • Buy 490 Put @ $0.35
  • Buy 510 Call @ $0.20
  • Total debt $55.00, no commissions.
 
Forex Forex

I`m at the computer running some videos on gamma scalping.

I was puzzling how to do an adjustment in a Long Straddle, or Strangle. Think somewhere I have gotten the idea that means if the market is going up, you buy INSURANCE with some PUTS, or vice versa if going down. I believe you buy enough insurance to become Delta Neutral again. At least it says to RESET the STRADDLE. Whatever that means?

I still do not understand why the STRADDLE gained on both premiums to give a profit? What caused that? With up and down movement of the index. The adjustment is to lock in some profit, though it looks like you should just do what one video said, simply set a profit target for the daily ATR range and take your profit and exit.

I´m certainly learning what the GREEKS mean, even though I have read them a 1000 times and never kept them in my head before. I guess it will come clear over the next week. Kind of fun, but trying to get some sense of the changing relationships and how to profit from it.
 
Quote from falconview:

I was puzzling how to do an adjustment in a Long Straddle, or Strangle.
More...

No adjustments needed. Just determine the maximum dollar loss and buy both calls and puts. Then close the position at a loss or profit.

WARNING: You do not want them to be auto exercised if the options drift ITM. You might find it best to close both the calls and puts even for pennies if you will not be around for expiry.
 
Hi to all. Sorry to barge in on your thread, but I am looking for some know-how on “price discovery process” for option combos. Let me explain what I mean. I’m looking at trading option combos, say butterflies, and as far as I can tell (please correct me if I’m wrong) there are no exchange traded combos. So the prices for the combos are derived from the underlying vanilla options – this gives implied spreads. However, (as far as I can tell) these implied spreads are completely (how shall I put it?) unrealistic. For example, it is often the case that the spread on a butterfly has a negative bid price and a positive ask price, i.e. if one where to trade at these implied prices, one would pay for a butterfly when buying it and also pay when selling it. Surly this is just plain wrong. So, my question is: how does one find out what the prices are for combos? Many thanks.
 
Quote from Alex123:

Hi to all. Sorry to barge in on your thread, but I am looking for some know-how on “price discovery process” for option combos. Let me explain what I mean. I’m looking at trading option combos, say butterflies, and as far as I can tell (please correct me if I’m wrong) there are no exchange traded combos. So the prices for the combos are derived from the underlying vanilla options – this gives implied spreads. However, (as far as I can tell) these implied spreads are completely (how shall I put it?) unrealistic. For example, it is often the case that the spread on a butterfly has a negative bid price and a positive ask price, i.e. if one where to trade at these implied prices, one would pay for a butterfly when buying it and also pay when selling it. Surly this is just plain wrong. So, my question is: how does one find out what the prices are for combos? Many thanks.
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Typically you will find you can execute the trade at the mid point of the bid/ask price maybe better/worse based on which vehicle you are trading. If you have Thinkorswim you can right click on the trade and show market depth. If you see the butterfly isn't trading with a lot of volume, you may want to break it up in verticals which will have a better fill but means you are exposed when one fills and the other side hasn't yet. If you are trading broken wing or skip strike butterflies or some other configuration that isn't standard, you will definitely want to break the trade apart into verticals. Another thing with thinkorswim is that they route the orders sometimes to BATS exchange with screwy bid ask spreads so you can go in to your order and change BEST to one of the other exchanges depending on the volume you saw in the market depth
 
Dolemite, thank you for taking the time to read and reply to my post. I often observe that the mid price is 0, so if one where to place a sell order with a price more aggressive then the mid, one would end up paying. Frankly, I find this whole situation with negative bids (and positive offers at the same time) very bizarre. How do all big prop desks trade combos? Is it all OTC? Is there some centralized interbank system?

But more importantly, how would one go about back-testing a strategy, given this situation with implied spreads? Thanks.
 
Quote from Alex123:

Dolemite, thank you for taking the time to read and reply to my post. I often observe that the mid price is 0, so if one where to place a sell order with a price more aggressive then the mid, one would end up paying. Frankly, I find this whole situation with negative bids (and positive offers at the same time) very bizarre. How do all big prop desks trade combos? Is it all OTC? Is there some centralized interbank system?

But more importantly, how would one go about back-testing a strategy, given this situation with implied spreads? Thanks.
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They are trading the verticals or individual options. Remember, most butterfly pricing is an aggregation of the mid prices or so of all the individual components thus they can have a negative number which means you could buy as a credit which is impossible because it would be a guaranteed winner and people a lot faster and smarter than us would snatch up every butterfly they could. As for backtesting, I am not the person to ask because I don't believe in it. I have tried various backtesting software over the years including ones with intraday data and it just doesn't give you a true picture of what is going on. Even using TOS on demand which is about as accurate as you can get, didn't give me a truly accurate picture of the trades. I am sure most will differ but the best thing you can do is fund an account, trade small, and don't expect to make money any time soon. Breaking even (excluding commssions) over a period of time should be considered a victory.
 
Quote from falconview:

Yikes! What is happening to my Long Straddle position? Explain it please?

From the time I bought the straddle this morning, both the CALL and the PUTS have increased in value if I want to sell them? I have together a profit of .44 cents and hold 2 contracts of each.

Which in this novices calculation comes to 400 x .44 = +$176. If I close it now, I make money less commissions $12. What the heck do I do? I wasn´t planning on this.
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HA! You got caught in beginner's luck. Nothing like opening a two-way position and watching it INCREASE el quicko, eh? :confused:

What happened yesterday(I was watching this most of the day) was that the VIX shot up to the moon. If the VIX goes up enough, it'll balloon up a straddle position to the point where you think YOU'RE THE MAN...

Only problem is, when that balloon deflates(as is happening RIGHT NOW, 6/17/11, 10:10:35am) you're little straddle turns into a tiny little straddle.

Lesson here is that if you get a BIG lucky VIX break(not all that common), STOP everything and cash that baby out. VIX spikes like what happened yesterday usually don't last, and you can end up really kicking yourself cuz you waited for an even bigger payout.

File this strategy under the heading "No ever went broke taking a profit".
 
DOLOMITE

I´m seriously thinking of buying a picture frame and hanging your comment on my wall over the computer desk.

" I spent 14 years trying to find that one option trade I could put on like a robot and exceed average market returns. Unfortunately, I couldn't find it."

Wonderful, as I´m still looking after the last two years. Makes one think, if not give in. :cool:
 
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