trade summary: 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 8/8/2011 38.24 5 3.95 5 6.00 $4,975.00 $400.00 8/9/2011 37.33 5 3.15 5 6.85 $5,000.00 $425.00 8/10/2011 exit 5 3.65 5 6.25 $4,950.00 $375.00 $375.00 realized PnL ~ 8% in 13 trading days. Great! Now that I've got my feet wet, I'm going to take a little time to refine my risk estimation for this kind of trade. Namely, I've got to take fluctuations in volatility into account. At least, that's how I think this trade made money. It seems I should seek out chart patterns where volatility decreases before some sort of breakout and big move, e.g., a spring or wedge. Buy the straddle as price moves to the apex. After a little research, back into the fight.
I am going through Taleb's book, Dynamic Hedging, to try and apply some quantitative power to straddle trading. After some time struggling with the content (difficult in places), the obnoxious, blinding book cover (had to throw it away), and re-gluing the binding (probably my fault, leaving it in the car, reaching a temperature of perhaps 2000 K), I have learned something important. Volatility is measured in two ways; historical volatility, computed using past price moves, and implied volatility, which is the premium of the option. Obviously, as I learned with the past trade, changes in volatility can really change your straddle PnL. So the first thing is that volatility should be tracked just like price, and the straddle should be purchased at the low end of the range. Secondly, the change of the option price with changing volatility is called Vega. (An interesting, faux-Greek letter. Sounds cool.) If you want the price of the option to increase as much as possible as the volatility increases (we do, for straddles, since we want to sell it), then you want the largest Vega possible. The book produces some graphs which show that Vega maxes out right at-the-money. Thus, I now have justification for buying the straddle at-the-money. Also, I will have to use Vega as part of the selection process deciding which underlying to straddle. Which means I will have to learn how to compute it or get it somehow. In other news I installed QuantLib and have begun toying with it. Hopefully this will reduce the amount of work putting into play what I learn from Taleb's book.
I've traded straddles a few different times. Everybody says they are a waste of time, unless you are expecting a big move, to boost the volatility. I've found if you just buy them and wait for them to increase about three strikes, they return around 3 %. You get this in indexes about 1 or 2 a month. That should give you 30% a year. I never found anything wrong with getting a long straddle doing that. I'm re-thinking straddles though. If you have one year experience, tell us about it. Lowest volatility in the QQQ or OEX is when the index is moving through the strike price. Albeit slowly, back and forth. The two bought sides even out pretty much in dollar and cents value. ( Buy PUTS and buy CALLS ) Which you set a limit order for the joint cost of both premiums and wait for it to jiggle around until you get filled. In the QQQ a good straddle combined premium is about $5. 25 to $5.60. The story about my current attempt at Long Straddle trading is at TRADING LONG STRADDLES.
I do not clearly remember the details of my long straddle trading. But if you do a long straddle, for $600 at risk, and you make 3%, and your commissions are $20 in and out, you would actually lose money on the trade. You would have to make 7% on the $600 at trade risk. Not sure you could do it? To clear 3% return.
Understand it works both ways-- with a volatility crush your long straddle will suffer.... regardless a true "straddle" is ALWAYS ATM and hence delta neutral. A "strangle" on other hand will be entered when underlying price is between between 2 strikes on entry...hence OTM... however not as sensitive to volatility changes.
Implied volatility (as computed by IB) is now below historical for SLV options. This morning I picked out the 31 Strikes, July, which had the least volatility compared to surrounding strikes at the time. I like to give the trade some time (months) without having to worry about losing a lot of time premium (it accelerates the last three months till expiry).
Using the last bids, the trade is breakeven for the week. I had an order in to dump the whole thing for about a 3% profit from mid-morning, but didn't get filled (it ended up being around high offer of the day). On Tuesday bought the 31 strikes for the low premium, and reviewing the trade SLV was a little below 30 when I did. Thus this straddle was a little biased to the short side. As it turned out, that was a good thing for this week. On the other hand, option premiums contracted even more across the board this week. Both my options and the VIX finished lower. You can see from the bar graph how the intrinsic value of the straddle increased while the premiums were crushed. And that was part of my motivation to get out of the 31 straddle and open a new one at-the-money. This would serve me better if silver starts back up next week. I'll see if there's an opportunity again on Monday. On this bar chart, the top bar is the entry, then each bar underneath has the next day's closing prices:
^^ I got de-motivated from posting when a few days worth were knocked out by the ET software change/changeback, but obviously it worked out. Anyway, I noticed the implied vol. of AAPL was way down... 6 month lows, maybe more?? I bought a 430 Oct (I think it was Oct) straddle while AAPL was around 427 today. I have no idea why the implied vol. of AAPL is evaporating while plenty of other stocks are doing the opposite. Feel free to comment. I also noticed I can hardly tell an APPL chart from a GLD chart. What's up with that??
What implieds did you get in the AAPL options at? And where do you expect realized vol to go in the the life of the trade?