Question about Straddles

Discussion in 'Options' started by JT30, Aug 15, 2011.

  1. JT30

    JT30

    Hi. I had known about Straddles for a while now, but am only starting to get into actually trading them now. One thing I had always been led to believe about them is that they are direction-neutral. That is, all you're looking for is a substantial move in one direction or the other. Now that I'm actually starting to trade them, what I'm realizing is that this is only true at the beginning of the trade, and once you actually get a big move in one direction (assuming, for the sake of this question, that you do), it has to continue moving in that direction for you to continue to make money on it. This makes perfect sense (as if it starts moving in the opposite direction, it's getting closer to ATM again), but it's just not something I had really thought about. How do you handle this? Is it common practice to close out of one Straddle when profitable and buy a new one at the current ATM strike, thereby reestablishing it as a direction-neutral position? Thanks.
     
  2. You can hedge the delta, which wouldn't quite get you to where you want to be. The right way, as you correctly suggest, would be to roll the strike, although that might often be costly, bid/offer-wise.
     
  3. I would also check out a STRANGLE, 1 strike OTM. They are cheaper than the straddle and would give you a bigger percentage gain.
    http://www.investopedia.com/terms/s/strangle.asp


    No .... Straddles are a tough way to profit with options and to get a winner twice in a row would be very lucky. You need a watch list of stocks and then rotate them around.

    Another thread on Straddles: http://www.elitetrader.com/vb/showthread.php?s=&threadid=222085



    ---------------------------------
    I put the ELITE in EliteTrader
     
  4. Here's one approach:

    http://www.optionetics.com/articles/article.asp?id=15166

    Bear in mind that you have to get dome amount of IV and/or direction right for gamma scalping to work.


    Another way to handle the appraciated straddle is to adjust. You can roll the profitable leg back to ATM, sell other legs against it, etc.
     
  5. There's no one size fits all answer since there are multiple variables at play. With modest price movement and passage of time, a strangle can lose more $$ than a straddle.