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Discussion in 'Options' started by jgiasi, Apr 29, 2009.

1. ### jgiasi

Can anyone advise as to how large a move is needed (up or down) for an at the money straddle(simuntaneous buy of both a put and a call) on the SPY to become profitable.

Thanks, Jennie

2. ### just21

Is this a school project?

3. ### JJacksET4

The answer to your question of course depends on the time and if not at expiration, then the IV.

Purely at expiration, the move simply needs to be large enough to cover the costs of the put and the call. A quick example should make it easy to understand:

Stock XYZ is at \$50
50 strike call for a given time costs \$300
50 strike put for a given time costs \$250

Stock must then move > 5.5 points away from \$50 for the straddle to be in the money at expiration.

i.e. - stock is at \$55.50 - call and straddle will be worth \$550
i.e. - stock is at \$56.00 - call and straddle will be worth \$600

i.e. - stock is at \$44.50 - put and straddle will be worth \$550
i.e. - stock is at \$44.00 - put and straddle will be worth \$600

So, at expiration, the stock needs to move the number of points that the put + call combined to cost plus just a bit more to profit. Obviously a bigger move results in bigger profits.

Before expiration, a smaller move can make a straddle profitable, or theoretically even no move if IV (Implied Volatility) increases enough.

It's often not considered wise to hold a straddle all the way to expiration - most straddle holders I think tend to use "time stops" to close a position before time expires on them and if a stock makes a huge move on a given day, then they take profits on that day (not necessarily of course).

JJacksET4

5. ### xflat2186

Even better is to trade options vs. options and if you were long the straddle rather than closing out the legs if you get a delta move or a vol pop you could sell other options vs the straddle, locking in the vega/delta scalps.

6. ### jones247

Is it really better to gamma scalp with options as opposed to using the underlying stock for gamma scalping. The commission cost and the bid/ask spread would favor using the stock instead of an option to lock-in profits as a delta neutral play...

Walt

7. ### spindr0

Would you be so kind and grade the various replies?

8. ### pengw

With long straddle, you are racing against time, also you are betting IV going up, at least won't drop because it is a long vega and short theta play.

See attached chart, for Oct spy long straddle in the chart, with each day passing, you are losing \$11.46, you need spy to go up 1.6% or down -1% just to stay even with one day passing. Also you are risking IV collapse. The bid/ask spread for spy is relately small, that is good news, but you have to monitor the position closely, be ready to close out the position once your pre-trade assumption proved to be wrong.

Try the Quick Loss function in the Options Lab ( http://www.TheOptionsLab.com ), then you will see the enemy of a long straddle position is time, IV drop AND whipsaw price action.

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9. ### Retief

Below is an analysis of a SPY straddle for October 09 expiration, long 4 puts @ a strike of 104 and long 200 shares of the underlying. For break even at expiration, the underlying either needs to have either declined by 4.84% or increased by 3.98%.

10. ### spindr0

I think the stock is better because the B/A spread is a killer on the options. Also, you can fine tune the position's delta with odd lots of stock.

#10     Sep 25, 2009
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