Noob question about a Straddle

Discussion in 'Options' started by pstvthnk12, May 11, 2022.

  1. Hey guys I'm just getting started trading options but already running into some things I don't get.

    This is a paper trade I placed on thinkorswim. I'm trying to create a Straddle where I'm basically neutral on direction of the market. I'm just looking for this stock to move up or down sharply.
    upload_2022-5-11_13-30-18.png

    Where I am confused is the delta.... the delta of the Puts is much higher than of the Calls. Does that mean I should have bought less Puts? Is that the key thing to make sure that the position is market neutral?
     
  2. MrMuppet

    MrMuppet

    oh boy, I hate to rain on your parade but you have a looong way to go.

    Before you do anything in options, make sure you really understand what drives prices. I know that it may sound appealing to a beginner that you can buy a put and a call and just wait for the stock to move.

    When you trade options, you ALWAYS have a relative value bet. Stock moves 5% either way, but what if the options you just bought implied a move of 10%?

    You got the stock right but you were buying too much for the options. So please, please with a cherry on top educate yourself. Start with Sheldon Natenbergs Options Volatility and Pricing and then decide if you really want to go down that route.

    To your question:

    I mean, as far as I can see, you have bought 12 calls and 70 puts so it seems pretty obvious that you have more short deltas than long deltas, no?
     
    BlueWaterSailor likes this.
  3. JackMorgan

    JackMorgan

    dude, SWCH is the subject of a buyout.

    generally not a good candidate for a straddle
     
  4. JackMorgan

    JackMorgan

    Sheldon Natenbergs Options Volatility and Pricing, uh, kinda the deep end of the pool for a noob , no ?
     
  5. "I want to be a doctor, but I don't understand all this "anatomy", "physiology", and "pharmacology" stuff. Can't I just pick up a scalpel and start cutting on people?" :)

    Well, you could - but there would be negative consequences. To put it mildly. If you want your patients to live, and yourself to stay out of prison, you've got to do a bit of work...

    Natenberg, Hull, etc. - that's just the foundational theory, the basics you need to know to trade rationally. That's before you even get into the really hard stuff - practice - where you get to take chances that might completely wreck you. Anyone who is serious about this will do one hell of a lot of reading beyond those fundamentals.

    But for anyone who feels like diving in head-first without checking - sure, go ahead and provide that liquidity. Those of us who did the hard work that's required will be grateful for the additional bump to our PnL.
     
  6. MrMuppet

    MrMuppet

    it's the bare minimum...anything with less info is just a brochure
     
    BlueWaterSailor likes this.
  7. Baozi

    Baozi

    you might be neutral at inception, but delta changes with spot, so as soon as spot moves the position start accumulating deltas in either direction. And for sure on a long straddle you dont want to be neutral for long time.. and best of luck to you, please dont go all in when starting out with options, just try with 1 lot first..
     
  8. xandman

    xandman

    You just need to hit the broad side of a barn. Yes, market neutral in many definitions maps to being delta neutral. But, expect variability in the delta of your position. You cannot always be perfectly delta hedged in real time or you would be generating enormous costs in delta hedging.

    Think about the probable move you expect and the current market variability that can be construed as noise. You should be able to tolerate some flip-flopping of delta or delta dollars within a range. Otherwise, you may have put on too much size! Hopefully, that bet on increased volatility materializes soon and you take the profit for the expected/probable move. If not, you bleed theta waiting.

    Don't expect equal quantities of puts and calls to initiate a zero delta trade unless it is the same strike and underlying is exactly pinned to that strike. Don't get hung up on it.
     
    Last edited: May 11, 2022
  9. TheDawn

    TheDawn

    Actually the underlying being a subject of a buyout is the perfect candidate for a straddle which is a option combo that's market-neutral but is looking to profit on a unusually huge move on the underlying in the future. So the OP bought the correct option combo for the underlying and the company did get bought in an all-cash buyout deal and the stock actually jumped 9% today. https://www.barrons.com/articles/switch-stock-take-private-deal-digitalbridge-51652273329

    The only thing is the OP bought more puts than calls so I am not sure if he profited from the move. If he had bought more calls than puts, he might be in a better shape assuming the cost worked out.
     
  10. TheDawn

    TheDawn

    Delta measures how much the option price will move with $1 move in the underlying. The difference in delta between the puts and the calls is not a determination of strategies to take; it's just an indication of how much each type of option would move according to a $1 move in the underlying and they are dynamic and do change according to how the underlying moves. Whether you should buy more of one type of option vs. another would depend on what you think would in the future to the underlying. If you think the underlying has a more probability of falling in the future vs. rising, then you would buy more puts and vice versa, in a nutshell.
     
    #10     May 12, 2022