Trading Long Straddles

[Robwynge]

Quote from falconview:

Gap Trading was very lucrative with 4 months of funny money trading. Made 297% in four months. But when I opened a $10,000 cash account, I won the first trade, but lost the next three, which has put me down 30% of cash account. So now I must put it aside for now, though I know the error.

It's interesting, the OP has received a lot of advice in this thread, but it seem nobody has commented on his terrible risk management, which assures that he will fail no matter what strategy he adopts.

OP, do you realize you blew out trading a very conservative strategy? Seriously, vertical spreads, whether debit or credit, are LIMITED RISK strategies. You can never lose more than a certain capped amount, which is an amount you select when you put on the trade. The only way one can blow up like you did is to trade with a maximum loss that is far too large for your account size.

From the looks of it, it appears you were risking $1,000 or so per trade, which was 10% of your account. The is an absurdly high level of risk. Even if you had an edge (doubtful, but still...), you could easily blow up in one short period when the natural statistical variance inherent in the strategy turned negative. No professional I have ever read would recommend risking 10% per trade. Most say no more than 1-2%.

If you continue to trade this way, you will lose all your money, no matter what you do. You clearly do not understand the most basic concepts in risk management or statistical expectancy. Do yourself a favor and read Van Tharp's "Trade Your Way to Financial Freedom" to get a handle on these critical ideas.

Quote from falconview:
Why the long straddle? Well I knew a guy in South Miami did very well at it. Started his own brokerage, started his own bank and both himself and his wife traded long straddles. I never found out what he was doing, just got titillated by my discount broker at the time over the phone.

You know, when I first read this I thought the OP must be kidding us, like this was some satire of a clueless newbie, that nobody would seriously consider putting money at risk because "a guy in South Miami" supposedly did well "25 years ago" buying straddles. Sadly, unless you really enjoy a long joke, you seem serious. This might as a bad a reason to select a trading strategy as I have ever seen.

Lastly, others have touched on this, but I'll add my $0.02 - straddles are a low probability strategy that only makes sense when the implied vol is very low and you have a reasonable expectation that the range bound underlying might be setting up for a large move. Only then might the underlying move enough to make up for paying the double premium.

 

[iceman1]

falconview...

do you ever 'leg' into spreads

do you always trade the same months; or do calendars

ever trade weekly options?

 

[falconview]

I´m no longer trading the long straddles ICEMAN. I tried legging in, but it didn´t work too well

I´m trading straight buying, of puts and calls.

I understand the risk management being offered and am well aware of it. Just beating my own drum for a while. I´m a person learns the hard way. But thanks for the heads up. It´s only money! ( grin )

I being the original poster, or op, just using this forum to chit chat.

A very useful lesson I learned this month. Was when on a winning streak, ride it as much as you can, say a higher risk percentage, with higher risk. What I have just learned, is when you take two losses in a row, assume the worst that the market has turned, or your method has quit working, or pyschologically you are out of rythm for some reason, and IMMEDIATELY switch to 1 contract in options, and since I was trading deep in the money, go to out the money contracts. This lets you keep trading until you figure out what went wrong, and get back in the winning streak, or rythm again. ( minimum funds at risk ) Then start scaling up size and premium value, once more. See what happens next cycle? Right now I´m back on the winning streak again and going to start scaling up in size Monday.

I´m still hoping somebody will give me a source on tax obligations for short term index option contract trading.

 

[EliteThink]

Quote from falconview:

Having an argument with an accountant. She insists that I will only pay 15% on profits for short term index option trading. I have been told 40% by somebody on here. Now I´m really confused?

last i checked it was a blended rate. 60% long term 40% short. google it.

 

[iceman1]

Quote from falconview:

I´m no longer trading the long straddles ICEMAN. I tried legging in, but it didn´t work too well

I´m trading straight buying, of puts and calls.

I understand the risk management being offered and am well aware of it. Just beating my own drum for a while. I´m a person learns the hard way. But thanks for the heads up. It´s only money! ( grin )

A very useful lesson I learned this month.

did you not notice... or were you not looking - last month the indexes had some of the largest moves higher in how many decades??!!!

You gotta figure in these economic times it would be followed by choppy markets or even downside.

 

[falconview]

It´s much harder trading multiple days. With the EXCHANGE putting me at a disadvantage. I hate letting a profit run overnight and I also hate not being able to close a short trade with a profit, because I´m not allowed to, forcing a loss by holding overnight.
Trying SWING TRADING, and so far it is working on minimal contracts, of one contract, but have lost my freedom of choice.
Certainly a different way of trading, even though I´ve got 4 wins now on minimal amounts. Have to step up my trade size to earn bucks.

 

[falconview]

Thought I´d just pass this on, for comparison sake, for a lot of newbies. This is an article for traders in the country of Belize. Mostly USA retiree types. You will notice the paragraph, lower down, and my opinionated piece on SPREAD TRADING.
__________________________

Friday, November 4, 2011
Belize Bond trading news updates, November, 2011.
http://www.cbonds.info/em/eng/emissions/emission.phtml/params/id/11101

This is the URL site for trading in Belize Bonds.

Yesterday afternoon I received in Hillview a phone call from the Chinese wanting to buy Belize Bonds. My Smart cell phone had trouble with the connection here in my suburb on the side of Green Parrot Valley in Western Belize. After a number of phone calls, and disconnections, I finally managed to understand the query from the caller and it turned out they wanted to trade in Belize Bonds. I had no knowledge of trading in Belize Bonds and told them so. To a point at one time, and they were referencing a Western Belize Happenings, BLOG SITE article, about trying to start a market in trading Belize Bonds, written in 2009 by myself. That attempt never managed to get off the ground though, as I could not then find any Belize Bonds for sale. The above web site gives the trading in Belize Bonds and it looks like they are selling at par?
The interest debt payments covered by the BONDS is rumored to jump to nearly a $100 million dollars, though I am not sure if that is USA or Belize currency? I believe it is US currency? The interest on the Belize Bonds is going to cost the very small government of Belize, about one quarter of the Government revenues in 2012?

I have evolved to become a specialist trader in INDEX OPTIONS and for the last half of this year have specialized in trading the QQQ which is an index TRUST, covering NASDAQ type stock trading. My speciality is short term trading of option contracts. Usually less than one week. At the moment I only have four months in trading the QQQ options contracts. I spent the previous 18 months learning and specializing in various type of INDEX OPTION, SPREAD TRADING methods, and finally discarded these supposedly SAFER methods of trading, as not so, nor particularly lucrative in the total. My goal for 2012 is to double my money every six months. That was happening up to about a month and a half ago, when the EXCHANGE RULES marked me as a PATTERN TRADER and forbid me to do one day trading anymore. This wrecked my trading method I had evolved, by long research and trial and error, and subsequently I have had a big drawdown, trying to figure out how to trade according to the new EXCHANGE RULES of mulitiple days of holding a trade, by trial and error.
It was only this past week, I seem to have hit on a new successful methodology of trading these contracts and am looking forward to covering my drawdown by January the first of the year, and starting to work on doubling capital again, in six months, the first half of next year. It is an interesting career and occupation. There are probably up to 20 traders in Belize trading, but usually are expat retirees. I have not been able to get anybody to train, competent coming from the University system in Belize, so shortage of trained staff for world international trading is a problem here in Belize, as is internet access, speeds and bandwidth. Only one company is offering internet service in the country of Belize, capable of handling the data flows needed for international trading around the world. (BTL ) Unfortunately, the wireless connection is SHARED by others in the community and when everybody is on, it slows down the data flow considerably and is an inconvenience when urgently trying to implement a split second, buy or sell order, and you cannot do so. My trading room uses four computers. Two of which are running almost all the time. I have battery and inverter emergency backup electricity services also, as brownouts used to be common earlier this year.

Posted by A Professional BEACH BUM retires! at 4:00 AM 0 comments

 

[falconview]

Well it´s December 19th today a Monday. Not only did I NOT make back my losses mid year, I was unable to get back to my original starting capital of $10,000.

Nearly did it, day trading, closing trades before the close. But ran afoul of the EXCHANGES and they say I am not allowed to day trade as a pattern trader, but MUST trade overnight. Though if I raise my gambling balance to $25,000 they will allow me to day trade. I can´t see the difference myself. It being my money and whatever the difference between $10,000 and $25,000 qualification. I don´t get it at all.

Anyway, after they handicapped me, my game went to hell. Too much swing or noise and price changes in multiple day trading. I´ve designed and tried a dozen or more methods, but no luck. This past week, I lost anything I had ahead over the past 5 months and ended up just $21 over my starting balance of 5 months ago. Going to halt trading now for two weeks and resume in January fresh start, with my new year balance at $7208.

 

[falconview]

WELL I LOST 26% OF MY ACCOUNT THE SIX MONTHS PRACTISING TRADING WITH REAL MONEY DURING 2011. MOSTLY I BELIEVE, TO THE EXCHANGES BLOCKING ME, WHEN I STARTED TO MAKE MONEY VOLATILITY TRADING ON A WEEKLY BASIS. THEY SAID I WAS A PATTERN TRADER AND CAN ONLY TRADER MULTIPLE DAYS. FOR 2012, I WAS TRYING TO DECIDE WHETHER TO QUIT OR NOT, DUE TO THE HANDICAP THEY PUT ME UNDER FOR 4 MONTHS, BUT SOMEBODY ONLINE RECOMMENDED I TALK TO MY BROKER. I DID AND THE BELOW IS THE WAY IT STANDS NOW.
________________________________
I´m now trying to re-figure after 4 months, how to do that straight buying and selling volatility trading again, that was successful back then 4 months ago, before the EXCHANGES BLOCKED ME.




Sunday, January 1, 2012
THE EXCHANGES DAY TRADER HANDICAP RULE IN THE USA.
THE DAY TRADER RULE FOR OPTION TRADERS

Option trading being a wasting asset, when the price melts on you, called TIME DECAY, the Day Trader rule set by the EXCHANGES is a real set back and difficulty for straight buying and selling OPTION TRADE CONTRACTS.

The basic requirement seems to be the EXCHANGES, want to penalize amateur traders, the small retail trader. You can open a trading account with as little as $2000 depending on your broker. However, the EXCHANGES in their WISDOM, or something else; have designated that if you do not have $25,000 in your account, should you DAY TRADE too much, you will be penalized and forced to trade with such a smaller account, in multiple day trading.

Given that trend followers, where the money is made, need to CLOSE at the END OF THE DAY, and put the profit in the bank, the overnight requirement by the EXCHANGES is a HANDICAP. The way it works I´m told by advisors with THINK or SWIM brokerage is that if you make 3 day trades per 5 day period, you are clear, but if you make a fourth trade, same day, you will be BLOCKED from day trading. At least that is what I thought, when I got a box on my screen that said I AM JUDGED TO BE A PATTERN TRADER and prohibited from closing a trade the same day, unless I increase my $10,000 account to $25,000.

Now I can´t figure out, why one can day trade with $25,000 and not with $10,000, or $2000, but that is the RULE from the EXCHANGES.

In the latest advisory from my broker, I am told I CAN day trade, or practice the art of closing a winning trade by the END OF THE DAY. Or closing a losing trade. I can do it TWO TIMES for the week, but I must otherwise hold my trade into multiple days,not knowing what the heck is going to happen. Lose more often than not. Due to not being able to cut my losses short, or correct a mistake by closing and reversing, or put a profit in the bank at the end of the day.

So much, for cutting LOSSES SHORT, or rectifying a mistake and closing and reversing your trade. If you make that Fourth trade in a week of 5 trading days, you get blocked.

However the latest advisory is that I can close a day trade up to twice in a 5 day period. Other trades must be held into multiple days. I´ll have to think about that as a strategy a LOT. As the OPTIONS ON INDEXES, I TRADE, are a MELTING ASSET. They lose premium each day due to TIME DECAY. If you are in the last week before the monthly EXPIRATION DATE, it gets even worse.

Just got an update from my BROKER. Said that I am only allowed TWO DAY TRADES per 5 day period. The THIRD TRADE must be multiple days, overnight holding. A FOURTH TRADE WOULD BE BLOCKED, REJECTED.

Anyway, as a budding beginning amateur OPTION TRADER, that is my current understanding of the EXCHANGE DAY TRADER HANDICAP SYSTEM. January 1st, starting 2012.

Lets see if I go broke this year?
Posted by A Professional BEACH BUM retires in Belize! at 10:02 AM 0 comments

 

[RichardRimes]

Hi falcon...just a note..futures OPTIONS...ES, NQ YM are NOT subject to the day trading rules. Since the VIX is low right now (compared to 2011 average) you might try trading one contract straddles (long). The mini's are perfect as they are liquid (atm options are at least) and cost wise affordable. The last two weeks of the option cycle while theta bleeds the delta/gamma can more than make up for it...actually a pretty good time to daytrade.