I hope to gain some experience and insight into straddle trades (simultaneous purchase of a put and call, same strike, same expiration) for both futures and stocks in this journal. I hope it can be a joint journal (others can talk about their own trades). I don't plan on doing many of them, at least at first. I'm considering a straddle of SLV (silver ETF) this morning. If you pull up a 1-year chart, you can see that silver's been moving quite a bit. I can imagine it headed up to test 50, or back down to 30. The way it's been moving, I can even say I wouldn't be surprise if it reached either of those two prices by this October. Hence the straddle. I estimate an ATM put and call, Jan 12 expiration, would cost about $450 each for a total of ~$900. Extreme scenarios we may see by October: (1) SLV @ 50: C + P ~ $1225 + $70 = $1295. +$395 (2) SLV unchanged (~40): C + P ~ 2 x $310 = $620. -$280 (3) SLV @ 30: similar to case 1. Exit plan is to get out no later than October (time stop) if no trend develops. Otherwise I will ride whatever minor trendline appears. If I get a good profit up front (first month) I will take partials. Profit taking is my psychological weakness. I'm too greedy. Thus, I will defer those decisions to my wife. I estimated the prices by looking at the last traded prices yesterday. Will verify with fresh quotes here shortly. I estimated prices Jan 12 in October (3 mo. to expiration) by looking at Oct 11 options now.
Fills Using "SMART" order routing on IB. Put in LMT @ the bid, 5 contracts, Jan 12 SLV. For the C is was 4.65 For the P it was 4.40 C's got a partial fill (4 ctcs), CBOE, and then the last ctc 5 min later. P's had the market move away, to 4.45/4.55, so I changed my bid to 4.50 and got fill after a minute (NASDAQOM). Summary: Bought 5 Jan 12 SLV 40 C @ 4.65 = $2325 5 Jan 12 SLV 40 P @ 4.50 = $2250 Total price for the straddle: $4575 Thoughts It's probably best to get into a straddle when the intraday price has settled down. Otherwise you could get stuck with only one leg while paying a high price for the other. Alternately, get in with MKT orders. I believe I made out this time saving about $100 or 2% with LMT orders. However, I think I just got lucky, and next time I will first ensure the intraday price is caught up in a range. I don't believe the intraday price is as critical as the intraday volatility when entering a straddle. You can't miss a good entry price, as when trading futures or stocks on one side.
Here is a visual representation of the trade. You can see if SLV continues to move as it has in the last year, this is going to work out well.
p.s. SI FOP DEC 41 P/C is $3600/$3950 at the moment. I'm not sure how good an idea it is to get involved with FOP on such a big contract (margin is ~ $25k) with an electronic, discount broker, which is all I have, so I decided against it. Hopefully others can comment.
Open questions, for opening a straddle: How does my arbitrarily-chosen tactic of buying ATM options compare to finding the best value among nearby strike prices, using Black-Scholes? How does my arbitrarily-chosen tactic of buying expiration 6-months out, with a time-stop for the trade about halfway to expiration, compare to any other choices for time to expiration and time-stop?
Code: Date SLV Calls Price Puts Price Value UPnL Entry 40.2 5 4.65 5 4.50 $4,575.00 7/27/2011 39.28 5 4.15 5 4.92 $4,537.50 $(37.50) 7/28/2011 38.74 5 3.85 5 5.10 $4,475.00 $(100.00) 7/29/2011 38.76 5 3.91 5 5.17 $4,540.00 $(35.00) In case anyone is wondering, the light lines are not prognostics of any sort; they just show the average ground price needs to go to cover to make the trade profitable by the end of October:
Code: Date SLV Calls Price Puts Price Value UPnL ------------------------------------------------------------------------------------ Entry 40.20 5 4.65 5 4.50 $4,575.00 7/27/2011 39.28 5 4.15 5 4.92 $4,537.50 $(37.50) 7/28/2011 38.74 5 3.85 5 5.10 $4,475.00 $(100.00) 7/29/2011 38.76 5 3.91 5 5.17 $4,540.00 $(35.00) 8/1/2011 38.29 5 3.55 5 5.35 $4,450.00 $(125.00) 8/2/2011 39.59 5 4.3 5 4.55 $4,425.00 $(150.00) 8/3/2011 40.55 5 4.75 5 4.25 $4,500.00 $(75.00) 8/4/2011 38.00 5 3.5 5 5.85 $4,675.00 $100.00 8/5/2011 37.32 5 3.45 5 6.15 $4,800.00 $225.00 Some thoughts--- It would be nice to model the profit/loss zones and plot on the chart rather than guesstimate as I did. It would also be nice to run a simulation of the SLV price into the future (many replications) to estimate the probability of entering or leaving a profit zone.
Looks like a broadening pattern could be forming. This would be helpful in identifying a good place to close the trade, since Bulkowski has already worked out the statistics. http://thepatternsite.com/broadb.html
UPnL doubled over the past few days, presumably due to an increase in volatility. Wife has commanded a 10% profit exit. Will look to unwind this position in the AM. I hadn't considered profiting this way when I opened the trade, but it seems like a good idea since it appeared seemingly out of nowhere, and could probably disappear just as easily. I noticed today the price of the straddle (P + C) was bid between 9.3 and 9.95, while offered between 10.1 and 10.7. The spread fluctuated quite a bit and was huge (~1.0) near the announcement.