Trading Long Straddles
- Thread starter falconview
- Start date
Very, very interesting. Thankyou for the contribution. I don´t think I´m going to do this though. With all that work, I might as well just play directional? Does sound interesting though. I wonder what the risk to reward ratio would be? If I remember right, the long straddle returns about 3%?
With directional you can if you close and reverse, more or less do something similar and the rewards are potentially higher.
With directional you can if you close and reverse, more or less do something similar and the rewards are potentially higher.
Gamma scalping is an entirely different strategy than a simple directional bet. It requires active and frequent adjustments (how often and how much is part of the art). It's not normally a strategy adopted by retail traders because the commissions can get pretty high. Tsk may be a pro or perhaps has negotiated lower commissions due to his volume (just guessing here). And it's not usually adopted by retail traders because, well, you really have to know what you're doing and most retail people don't. It's also a short IV trade, so you need some method/system/model to give you an edge in trading vol.
Gamma scalping may be applied to all sorts of trading styles. You can trade it directional by balancing your greeks in a way that makes you directional. For example if you're long biased, rehedge to +100 deltas on every hedge instead of 0 deltas. You can become neutral IV by hedging with backmonth options. Through gamma scalping, you can lock in profits at any point in time, not having to worry about targets (just commission). If you start thinking at a portfolio level with beta correlated instruments, indexes, futures, and complex option positions beyond your classical straddles and butterflies, things can get really interesting. in terms of risk-reward.
There's all kinds of retail traders. I know several who run pretty darn complex strategies with retail brokers and are doing just fine (more than fine actually). With regards to commission, it's overcomable if you trade decent size. IB charges $1 per 200 shares. If you hedge with the underlying, that's pretty good.
Yes, gamma scalping requires frequent adjustments but it isn't impractical at a low commish broker.
If you're long IV, IV contraction hurts. If 75 cent increments generate enough delta to trade and the UL gyrates at 60 ct increments, you don't trade and just decay. If you trade at 75 cts, and it goes $1.40 then you miss a chunk of the move. Apart from whatever art is involved, you also need some luck, aka UL cooperation. It's a beutiful thing when the UL cooperates it does and a slow painful death when it doesn't.
I know that slow painful death syndrome having in a previous re-incarnation traded stocks. I like much better options on indexes, which are over with, win or lose, in five days or less. Suits my temperament better. Plus the risk is defined at the outset. Getting the edge through timing, or some other wise gimmick is what makes it work though.
I don´t know the technical names for some of the stuff I´ve evolved for my own trading style. Generally I am using ( I think ) gambling theory. Using runs, I´m sliding with the action if it trends somewhat, but being options I don´t like to hold over five days and three is my preference. In a gambling run, when you are hot, you increase your bet each time. When you get hit, I drop back to one contract again. Until I have a couple of wins that tell me I have my edge, or timing skills back again, on whatever change the market has made to what it is doing. Then gradually start increasing bet size again. Usually measured by some parameter of money available above 50% of account capital, divided by the price of the contracts. Because of commissions, I first simply stick to one contract and buy IN THE MONEY, and keep increasing the in the money value of premium for as long as practical and then go to multiple contracts. This to allow commission costs to be as low as possible,when you are recovering from a hit. Waiting to get the rythm back in the market circumstances that have changed. If I can get a trend I like it. But otherwise will simply scalp with a fixed buy and sell order. Watching the volatility mostly, to tell me when to EXIT. The Day Trader rule caused me a lot of grief when they slapped me with the restriction. But I do believe I´ve adjusted to it now? We shall see as the next few months pass.
Whenever I trade long straddles, its almost always only with QQQ or SPY. And when I trade them, I always have to use more than 1 contract each, or else commission will eat too much into my profit.
For example. On Tuesday morning I did a long straddle with the SPY. I bought SPY March 135 calls @2.61 and bought SPY March 135 puts @2.86. Total investment: $547 per contract not including commish.
At this very minute, my total straddle is worth $598. Thats $51 profit and if you're not using IB assuming you're retail, you're looking at $20 min for comissh. Thats 40% of profits !
Therefore, when I place straddles, I always use at least 4 contracts.
If you are trading real money, 1 contract on a straddle IMO, is barely worth your time !
For example. On Tuesday morning I did a long straddle with the SPY. I bought SPY March 135 calls @2.61 and bought SPY March 135 puts @2.86. Total investment: $547 per contract not including commish.
At this very minute, my total straddle is worth $598. Thats $51 profit and if you're not using IB assuming you're retail, you're looking at $20 min for comissh. Thats 40% of profits !
Therefore, when I place straddles, I always use at least 4 contracts.
If you are trading real money, 1 contract on a straddle IMO, is barely worth your time !
Thats interesting thankyou for the contribution. I´m over on Ryan Patricks forum right now with a thread on direct buying and selling contracts. His thread is MY OPTION TRADING. I don´t trade straddles anymore. But since you made money in such a short time, it sort of sounds interesting again? I will keep that 4 contracts for straddles in mind. Or try to! It was a good volatility play this morning. I wonder how you predicted it, or if you did?