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What are the catches of being short options straddles?
- Thread starter kroponer
- Start date
1. If you sell a call and a put, you can lose only one side, so you will sell two options on one margin.
2. If the price moves against you, you can long/short the underlying stock and hedge yourself. If the price gaps up/down, you can lose a lot. However you can protect yourself with buying call/put with farther strike price, this is called iron condor.
3. Short straddle is a good trade when the option implied volatility is high, (for example before an earning report) and collapses fast (and the price does not move, of course). You do not have to wait the option expiration date, you can buy it back.
2. If the price moves against you, you can long/short the underlying stock and hedge yourself. If the price gaps up/down, you can lose a lot. However you can protect yourself with buying call/put with farther strike price, this is called iron condor.
3. Short straddle is a good trade when the option implied volatility is high, (for example before an earning report) and collapses fast (and the price does not move, of course). You do not have to wait the option expiration date, you can buy it back.
Quote from trader capitan:
1. If you sell a call and a put, you can lose only one side,
This is one of those myths that inexperienced traders believe.
What is true is that you can only lose on one side AT ONE TIME, or if you hold the position until the options expire.
Too many rookies take your advice of hedging the losing side with stock/futures. The bad news about that is you set yourself up for a serious whipsaw. It's far better to adjust with options. Then the whipsaw is far less costly.
But failing to cover (close) the winning side of the straddle at some convenient low price - when adjusting the losing side - is a serious error in risk management.
And failing to cover that winner is what allows the rookie straddle seller to LOSE ON BOTH SIDES.
Mark
http://blog.mdwoptions.com