Putting on a straddle when price between strikes

Discussion in 'Options' started by Joel Reymont, Jan 23, 2007.

  1. Folks,

    How do you put on a straddle when stock is trading between strikes and assuming that you don't know which way it's going?

    Books recommend buying ATM options but which strike is ATM in this scenario? The one closest to the price?

    My minuscule experience with straddles so far is that you make money when price goes in the direction of the most expensive side of the straddle.

    Also, would you buy the put and call separately here (is this legging into the position?) or just buy the straddle like ThinkorSwim lets you do.

    Thanks, Joel
     
  2. Buying in in the money straddle will bias your deltas towards the "more expensive side" as you said. To stay delta neutral, you could put on a strangle. Say a stock is at 52.50, you could buy the 50 put and the 55 call.

    Try buying it as a combo. You may get a better fill.
     
  3. I would consider ATM to be both options that are slightly ITM and slightly OTM with the stock price in between.
     
  4. Thank you guys!
     
  5. Would a ratioed straddle, biased toward the "inexpensive side" be acceptable? (more 50p's than 50c's)

    And if so, if I chose a hypothetical IV where the delta of the 50p was 1/2 that of the 50c (stock at 52.50), the ratio would be 2:1 to be delta neutral. Yet the risk graph would still be unbalanced (stronger to the downside). A ratio of 3p's:2c's would give a more balanced graph.

    It may be obvious, but I don't see it. Why doesn't the delta neutral ratio yield a balanced P&L graph?
     
  6. Your missing the most important element of Options: Gamma. :)

    The position you're putting on is only delta neutral at exactly the price you purchased the combination at on exactly today. Once the stock moves, time passes, or IV changes your delta will get more heavily skewed by gamma (and vega).

    Take IBM. I could put together a delta-neutral straddle by buying 1 Mar 95 call and 2 Mar 95 puts. Those puts give me 119 gammas, the calls only 66. For every point it moves down, My delta gets almost twice as negative as it gets positive if it goes up.

    With this ratio, my delta becomes +100 when IBM reaches 107. My delta becomes -200 when IBM reaches 87. In other words, a 10 point move down gives me double the benefit due to gamma.

    I hope that's what you were asking. :)
     
  7. straddles have a better success rate in general
     
  8. Fully Articulate -

    Yes, that's what I was asking.

    Thanks for the clear and concise explanation which further serves to remind me that I need to get past my very basic understanding of the Greeks. I need to be able to think and speak it rather than just understand it when it's explained to me :->)