do you guys agree on this trade?

Discussion in 'Options' started by konviction, Feb 18, 2011.

  1. I'm trying to get back into options and I'd like to focus on market neutral strategies like short straddles.

    Here is one I just put on for WINN:

    sold 3 march 7.5 puts
    sold 3 march 7.5 calls

    Once I found out about pair trading, and the possibility of risking very little to make just as much if not more than someone who had a directional bias, I was kinda bitten by that market neutral bug. It's my understanding that Buffet does a lot of MN stuff as well. Seems like this type of trading is the best of both worlds?

    My second question is this, should an option strategy be based on what the equity is doing, or what the overall market is doing?

  2. Locutus


    What will you do when you see a black swan?
  3. stoic


    I put most of my emphasis on the underlying, but I do keep in mind what the overall market sentiment is and the current OverBot or OverSold short term condition.
  4. spindr0


    How is a naked straddle market neutral (check your net delta)?
    Or are you saying that you hope WINN will be neutral?

    If WINN moves, how is it your naked straddle low risk?

    If WINN moves, how will you make more than someone who is directionally correct?

    You want a bottom up approach. The underlying is most important followed by the sector and the market.
  5. the strategy is referred to by some as neutral,as in directional outlook, but the term is somewhat misleading, not to be confused with delta neutral.

    "The Short Straddle is a strategy that could have serious financial results if XYZ moves substantially away from the strike price, e.g., as a result of a takeover bid (up) or poor earnings (down)."

    A Short Straddle is a combination of writing uncovered Calls (bearish) and writing uncovered Puts (bullish). Together, they produce a position which is neither, and thus, is considered neutral. It is used when XYZ is expected to stay within a narrow range around $60!

    When to use
    The investor should select this position only if XYZ is expected to trade within plus-or-minus 10% of $60 over the next 90 days. Many investors continually forget that selection of the proper strategy must address the expected price movement of XYZ over time and the financial impact of unexpected outcomes! The Short Straddle is a strategy that could have serious financial results if XYZ moves substantially away from the strike price, e.g., as a result of a takeover bid (up) or poor earnings (down).

    Risk/Reward Characteristics
    The maximum potential profit point is at the strike price (60) at expiration, and large potential losses exist in either direction if XYZ should move too far. Because stock ownership is possible due to the written Put, the downside risk can be large if XYZ has a large decline before expiration. To the upside, the risk can be large because the written Call option becomes similar to a short stock position beyond the break-even point.

    Break-even Point: Upside: Strike + premium received. Downside: Strike - premium received.

    Time Decay: Positive. If XYZ is near the strike price ($60), profits from decay accelerate most rapidly over time. If XYZ stays near $60 for some time after position is established, investor may decide to close out position and realize the gains.

    Volatility: An increase in volatility is a negative for the spread. The impact will depend to a large part on both the amount of time left until expiration and the price of XYZ relative to the strike price. Because an increase in volatility can have a large negative impact, it is important that the implied volatilities of XYZ's options be near historic highs before an investor consider writing a straddle!

    Assignment Risk: In that this spread contains two uncovered (naked) options, the investor must watch XYZ for possible assignment if XYZ is either significantly above or below the strike price as expiration approaches. By monitoring the time premium of the in-the-money option, the investor can determine the likelihood of assignment.

    Options Strategies :: Neutral Strategies :: Short Straddle
  6. tomk96


    a short call and a short put isn't pairs trading. that's just selling vol on that stock.

    if you think the straddle is high, then sell it. just make sure you know where you want to buy it back.
  7. daveyc


    You might want to just look at a plain butterfly trade for keeping yourself covered and maybe look at June for this stock if you think its not moving very much. Breakeven is around 6 and 9. Good luck.
  8. Head to Brazil before the clearing firm calls...
  9. sometimes "market neutral" sounds good. people think they don't have to predict market direction to make money. but the truth is they need the market to "stay still" long enough to make money from premium decay, which doesn't happen too often. The market is always moving, either up or down. just look at the SPX chart of last 5 years. do you see any extended period that the index didn't move for traders to earn premium decay????
  10. donnap


    It doesn't matter if anyone else agrees with it, you're the one with money on the table. Personally, I wouldn't make this trade, but maybe you know something about WINN?

    I don't agree that it is neutral. WINN is just under 7. So the trade is bullish for now. Looks like you got about a dollar for the straddle - so expiry BEs are 6.50/8.50. Not too much downside cush.

    If I were you, I'd have a plan to mitigate risk.
    #10     Feb 19, 2011