Trading Long Straddles

[mushinseeker]

Falconview, all positions have risk. If there was 1 magic position with zero risk all reward no one would take the other side of it. One truism of markets is that edges, once discovered gets arbed away. Your risk in straddles is that even if underlying moves 5 strikes, you might still lose $ since the "good side" pnl does not cover the bad side premium you paid for.

Just look at a risk graph of a straddle and the risk is fairly evident.

 

[Riffraffpatrol]

Quote from hoop121:

i'll let some of the more experienced guys on here explain some of the more advanced theory in calculating these options. but for one thing, the value of your long options decrease in value every day due to theta. the QQQ might move 5 strikes every 20 days, but unless it does this the very next day or week, the value of your spread will decrease on a day-by-day basis.

the strategy of the straddle or strangle is trying to capture that move in a short enough amount of time to where the remaining value of your long options are still profitable.

don't forget that almost 90% of options expire worthless.

And let's not forget the flip side of volatility..if that drops the stock can be frozen and the premiums will deflate as well.

 

[Riffraffpatrol]

Quote from MushinSeeker:

Falconview, all positions have risk. If there was 1 magic position with zero risk all reward no one would take the other side of it. One truism of markets is that edges, once discovered gets arbed away. Your risk in straddles is that even if underlying moves 5 strikes, you might still lose $ since the "good side" pnl does not cover the bad side premium you paid for.

Just look at a risk graph of a straddle and the risk is fairly evident.

In terms of behavior of the underlying equating to risk...the risk is the move takes too long to materialize...bottom line. You HATE consolidation when in this trade... it will slowly bleed you dry.

 

[falconview]

I´m enjoying the feedback, and hoping you will point out the faults in this.

A straddle, or strangle needs to be implemented at a time of consolidation. I do that. This means volatility is at a low. If you do otherwise, then of course there would become volatility shrinkage as part of the risk. I was not thinking of entering any other than consolidation times. I somehow didn´t think it was necessary to point that out. But see now, I didn´t explain myself clearly.

As to time decay. That is one reason you go to 90 day options to give you the time. So far in my limited experience, it has not effected the spread at all. You are waiting for directional price movement and a volatility spike from faster action. A small trend so to speak. There is a trend every week. I trade them directly when the VIX is higher.

Again, from only limited experience, it seems a straddle or strangle profits in 2 to 3 weeks. Not the 90 days you have taken the options out for. The only question so far, in my mind, is how to boost the returns.

 

[hoop121]

Quote from falconview:

I´m enjoying the feedback, and hoping you will point out the faults in this.

A straddle, or strangle needs to be implemented at a time of consolidation. I do that. This means volatility is at a low. If you do otherwise, then of course there would become volatility shrinkage as part of the risk. I was not thinking of entering any other than consolidation times. I somehow didn´t think it was necessary to point that out. But see now, I didn´t explain myself clearly.

As to time decay. That is one reason you go to 90 day options to give you the time. So far in my limited experience, it has not effected the spread at all. You are waiting for directional price movement and a volatility spike from faster action. A small trend so to speak. There is a trend every week. I trade them directly when the VIX is higher.

Again, from only limited experience, it seems a straddle or strangle profits in 2 to 3 weeks. Not the 90 days you have taken the options out for. The only question so far, in my mind, is how to boost the returns.

the concern we had was not that these strategies could not be profitable. it was that you stressed several times that they had NO RISK. if anyone ever tells you that you can make a 20%+ return with NO RISK then run away as fast as you can. haha

 

[falconview]

Well I´m waiting for facts, not cliches.

The point about time decay, or theta, apparently the writer is ignoring that the purpose of a spread is to negate theta effects. For how long that spread would hold off theta I don´t know in a 3 month options? Be interesting to find out.

So far, you have not put forth any concrete evidence that the assumptions are wrong? I do appreciate the effort though. If there are factual weaknesses I want to know them. I currently have a third of my small account invested in a long straddle. CASH MONEY.

I am also curious, what makes grown men, play with this forum on a Sunday. ( grin ) I´m very old, whats your excuse?

 

[Riffraffpatrol]

Quote from falconview:

I´m enjoying the feedback, and hoping you will point out the faults in this.

A straddle, or strangle needs to be implemented at a time of consolidation. I do that. This means volatility is at a low. If you do otherwise, then of course there would become volatility shrinkage as part of the risk. I was not thinking of entering any other than consolidation times. I somehow didn´t think it was necessary to point that out. But see now, I didn´t explain myself clearly.

As to time decay. That is one reason you go to 90 day options to give you the time. So far in my limited experience, it has not effected the spread at all. You are waiting for directional price movement and a volatility spike from faster action. A small trend so to speak. There is a trend every week. I trade them directly when the VIX is higher.

Again, from only limited experience, it seems a straddle or strangle profits in 2 to 3 weeks. Not the 90 days you have taken the options out for. The only question so far, in my mind, is how to boost the returns.

falconview...u explained yourself perfectly crystal clear. I didnt mention consolidation factor because u didn't.

Here is a perfect example where your perceived setup fails:

On 3/20 QQQ closed at 67.11. Perfect consolidated pattern. The June 67 straddle with 87 days remaining to expiration cost $ 4.70. The VIX was at 15.58... some of the lowest volatility we've had in long while.

On 4/20 the position could be liquidated for 4.30... almost a 9% loss. The VIX is at 17.44. If volatility didnt rise the position would be in double digit % loss.

In an approximate 2 week time frame- on 4/4 the position was at 4.22...over a 10% loss. VIX at 16.44.

At 3 weeks on 4/10- 4.45 with VIX at 20.39... a big jump in vol. Still down almost 6%.

There is your risk in a real world scenario.

 

[Riffraffpatrol]

Quote from Riffraffpatrol:

falconview...u explained yourself perfectly crystal clear. I didnt mention consolidation factor because u didn't.

Here is a perfect example where your perceived setup fails:

On 3/20 QQQ closed at 67.11. Perfect consolidated pattern. The June 67 straddle with 87 days remaining to expiration cost $ 4.70. The VIX was at 15.58... some of the lowest volatility we've had in long while.

On 4/20 the position could be liquidated for 4.30... almost a 9% loss. The VIX is at 17.44. If volatility didnt rise the position would be in double digit % loss.

In an approximate 2 week time frame- on 4/4 the position was at 4.22...over a 10% loss. VIX at 16.44.

At 3 weeks on 4/10- 4.45 with VIX at 20.39... a big jump in vol. Still down almost 6%.

There is your risk in a real world scenario.

In contrast... on 4/19 you couldve bought the front weekly 67 straddle for .62.... in about 4 hrs the position was worth 1.41. Trust me... not without its risks by any means... however this strategy definitely gives you an opportunity to take advantage of a move...while risking a low amount in the form of a slow price decay risk of a 1R.... with the very feasible reward potential of 4-6R and more.

 

[Riffraffpatrol]

Quote from falconview:

The only question so far, in my mind, is how to boost the returns.

Stop pondering... there is NOTHING you can do to boost the returns with the strategy you are describing.

I have already described how to exponentially boost your returns-- you need to remove the majority of the premium from the spread...the ONLY way to do this is by reducing your timeframe.

I saw on another post where u said u cannot trade intraday... why is this?

Regardless of what the reason is-- my suggestion is u do everything within your power to figure out how to overcome this obstacle. If it has something to do with PDT...then limit yourself to 3 trades or less a week... all it takes is one trade to easily get a return 10x higher in one day that the type of return you are salivating over being generated over an annual basis.

 

[babutime]

Quote from falconview:

Well I´m waiting for facts, not cliches.

The point about time decay, or theta, apparently the writer is ignoring that the purpose of a spread is to negate theta effects. For how long that spread would hold off theta I don´t know in a 3 month options? Be interesting to find out.

So far, you have not put forth any concrete evidence that the assumptions are wrong? I do appreciate the effort though. If there are factual weaknesses I want to know them. I currently have a third of my small account invested in a long straddle. CASH MONEY.

I am also curious, what makes grown men, play with this forum on a Sunday. ( grin ) I´m very old, whats your excuse?

1/3 ?

In a straddle? If it was an extremely low prob credit spread with small profit, yeah I can understand...

but putting 1/3 of your account in it means you expect the underlying to explode meaning your vol has to be BANG ON...

Noone here can forecast vol that well and to put things into perspective, you don't even have an elementary grasp on the greeks.

I'd get out while you still have the time.

At least tell us what the trade is?