Long strange/straddle on a high volatility stock?

Discussion in 'Options' started by cuallito, Oct 26, 2010.

  1. cuallito


    Hi, I figure I might as well get my bubble burst sooner rather than later. What are the risks to playing a long strangle/straddle besides the stock moving back to where it started?
  2. spindr0


    Time decay
    Decline in implied volatility
  3. Realized volatility can decline making it tougher to gamma-scalp around the position. :(
  4. Doltie: “Knock Knock”
    Trader: “Who's there...”
    Doltie: “Gamma Scalping”
    Trader: “Gamma Scalping Who?”
    Doltie: “Gamma Scalping Doesn't Work Anymore...blah blah, ha ha”
    Trader: "Then reverse Gamma Scalping will work...blah blah, ha ha"
    Doltie: "Damn"

    P.S. I have no idea what Gamma Scalping is, but the above is kinda funny.
  5. I would just add to Spins comments that position management is very important with long straddles/strangles (of course this is true for just about any options trade also).

    Depending on your situation, you might want to consider:

    At what level would you take profits?
    At what point in time would you cut losses?

    If there were profits, would you just close the position, or roll one side?
    If there are losses, do you want to close the current position and buy a new one further out in time?

    When are earnings coming (before or after expiration?)?
    Are you going to hold past earnings or close b4 earnings no matter what?

    Do you have a good enough understanding of IV and how it can be affected by company news, stock price changes, stock market prices moves (VIX), etc.?

    Also, just to mention it, apparently options that are ITM at expiraiton will now be exercised for long holders automatically, so if you don't want this, you have to either close the position before expiration or inform your broker you don't want it to be exercised. Not usually an issue as you would usually close a straddle well before expiration, but something to keep in mind. If you want more info about this, search other topics.

    Lots of stuff to consider there.

  6. cuallito


    I understand options theoretically, but I'm finding them hard to grok.

    I know this sounds naive, but if I keep an eye on it and sell the spread while I'm ahead I should be okay?
  7. I don't know what you mean when you are asking about selling the spread - there are many different spread types, bullish and bearish, calls and puts, bid/ask spread etc. Does that question relate to your question about Straddles or was it a completely different one?

    For a person starting out I would recommended:

    Reading over and over until you "get" it - starting with a starter book and/or a book like McMillians Options as a Strategic Investment (not a beginners' book, but I think can be very good for a person who is absolutely serious about learning more about options).

    Paper trading for a while, whether using the computer and some software to track gains/losses or literally just doing it on paper.

  8. cuallito


    Yes, you're right.
  9. thenmmm


    Well...i've written myself codes to test the "horrendous promise" of buying OTM due to the low delta...and...surprisingly or not - after many "trades" on historical data - the program finished with...zero money.
    It's just as they say: options are meant to be sold, as bad as the margin call "options" seems - better take this risk rather than praying that the stock will be highly volatile...unless you know something of the stock that no one else knows (which i doubt, sorry).
  10. right with you...gamma scalping justs sounds wrong on so many levels...

    #10     Oct 28, 2010