Hi all, With the financials going crazy lately and never sure from day to day which way they are going to head what do you guys think about have some straddle positions? Thanks, droid17
I assume you asking about BUYING such positions. Very, very risky. The basic news is out. The stress test has come and gone. The straddles are expensive. Do you still believe these stocks will continue to be volatile? Most importantly, do you have any experience trading options? This would be a foolish first trade because these positions are not simple to manage. Do you have a game plan for selling them? Mark
a- stock moves a lot, you win (intrinsic) b- stock moves a little or none, you lose (decay) c- IV goes up, you win (premium rises) d- IV goes down, you lose (premium drops) pick one from each pair and maybe net you win, maybe net you lose
Hi dagnyt, Thanks for your reply. Yes, I was talking about buying. I am relatively new to options, only about 6months. Have been using them to hedge long positions and doing ok. Although the news is out, I still think things are going to be shaky for BAC, C and the others that need to raise extra. At least for the next few months or so. I feel any day the Gov can step in and do something crazy like they did with GM and screw over the share holders. My exiting plan is if it hits one of these swings either way, set the desired gain and get out. Thanks, droid17
Droid, The truth is that most long straddles don't work. This is not a high probability type of trade; it's a speculative trade. The money in long straddles is made by letting the few winners that you have run like crazy. Since most long straddles lose, the idea is to lose small. Besides having a profit goal, think up a stop loss point, too. Larry McMillan, who has written a lot about long straddles, suggests exiting if you have lost about half your capital. That is only one way to do it--you'll have to reach your own conclusions about how to handle these.
Straddles were a great idea last year when the financials were dropping by the minute. You overpaid for them (high IV) and got rewarded big time because the drops were massive. You can judge for yourself whether now is a good time to do it by selecting a basket of active financials, monitoring several series of ATM straddles, and determining whether the moves are sufficient to compensate for the premium cost. If you see some consistency, dabble with a few. The more successful you are, the more issues you can do and/or in larger size as you get more confident (making money). But never get over confident and do anymore than you can swallow. Always remember that straddles have two sides decaying against you so you need to run disciplined stops if IV contracts and/or you go nowhere for a period of time. And as a plan B, you can sell OTM legs if you wish to defray some of their cost (even after a move), assuming that the new P&L curve is to your liking.
PS The banks are down moderately this AM. Check out straddles on GS, MET, NTRS, WFC, JPM, MET, USB, BCS. The lower priced stocks will probably give you more bang for the buck. Compare today's quotes to Friday's close. It won't be exact but you don't need precision to observe.
To go long puts or calls, you need a rapid, sizable move to be profitable. If you are unsure of the direction of the move, simply wait until the trend becomes clearer; then commit to one direction. Even in this instance, if the move is not quick and sizable, you will still lose money even though you got the direction right. So, once you decide how the underlying is going to act, then picking the appropriate strategy is the next step. Keep reading this board, and also continue to research the greeks and their effects on puts and calls. This will help you decide strategy based on market conditions. And, remember, there are many strategies to make money.