Straddling Exit Thoughts

CBC · Apr 20, 2016

Hi Et,

So I've decided to jump back on the ol straddle trade.

Originally, I used to close straddles out after a 50% return. Now I've been trading a while, I'm kinda thinking that mbey I should close out 1 leg after that trade has doubled in $$. Then my thinking was to hold the other leg as long as possible. Instead of just closing the whole trade out.

I already know whats going to happen. Some of the trades will be profitable, some break even and some a complete mess. + I might get a few hail marys in as well.

My thinking was that if I kinda got the option for free (sorta) then there is no more risk in holding the other option for as long as possible. My thoughts were that I should be looking to get the best value from my trading.

I'm aware I can run some back tests, I just wanted to know peoples thoughts. Mbey I could get a good idea.

Thanks.

OptionGuru · Apr 20, 2016

These are Long Straddles I assume.

IMO ........ Straddles are too expensive and I would go with either a Call or Put.

One exception: QQQ ATM weekly straddle/strangle entered on Thursday - the day before expiry.

Gimpyron · Apr 20, 2016

In case you are long straddles, like Optguru said, I have bad association about waiting one side to double up, the results could be painful.
We should meet in the market place, me as a seller and you as a buyer (I dont understand why one go long straddles, it's ridiculously expensive)
I believe 50% max profit should work best, anyway watch your IV.. its your only chance staying in the game

jeffalvinson · Apr 20, 2016

CBC, its actually a good strategy to close out 1 leg after that trade has doubled in $$ and hold the other leg as long as possible, instead of just closing the whole trade out.
You basically have a free trade at that point, so any positive gain in the leg that is left open
is pure profit. I traded long straddles in the 1990's for a couple years.
Here is the setup I used that made money every month I did it:
1: Pick a basket of 4 companies that are about to report earnings in the next 2-3 weeks and their stock prices are in the "middle" of a "trading range" (use a 6 month daily candle chart with a price channel (20) indicator to determine if the stocks are in a trade range).
2: I only picked stocks that have low volatility and have cheap ATM or slightly OTM options with 2 months left before expiration.
3: A single Call/Put pair combined cost (total debit) was in the $200-$350, not to exceed $350.
4: As the stock moved closer to its earning announcement day, the implied volatility of the
options in the straddle normally increase in value because of trader anticipation and expectation
of good or bad earning). This increase in IV (implied volatility) help to counter-act the normal time decay of the options.
5: If I didn't have decent profit after the earning announcement, I would close the entire position. Under no circumstances would I let the total dollar value (total debit) of put/call straddle fall below -40%. Because I bought 2 month options, . I would always close them out with at least 30 days left to expiration. So essentially there was a mental stop (-40%) and a Time Stop (30 left to expiration on a 2 month option) whichever came first.

Interesting Note: (My Best Long Straddle Trade Ever)
In 1999 one of my long straddle's was on the Clorox Company. The straddle cost (total debit) was approx. $340 per pair (2.00 calls / 1.40 puts).
I held the straddle for 2-3 weeks before its earning report. Its was suppose to announce earnings in the AM before the market opened, but after the announcement the stock was halted and didn't open until 11:00am that day! The stock price was $110.00 when I bought the long straddles and when it finally opened on earning's announcement day at 11:00am,
the stock price opened at 82!
The calls in the straddles were worthless, but the puts opened at 16.50!
I sold the puts at $1,650 per put for a total profit of +$385% per straddle.

No two straddles ever worked out the same. Some doubled on 1 leg so I would hold the other leg and finally sell it anywhere from +25% to in rare instances +100%.
The Clorox trade was an anomaly.
My average returns on the entire basket (4 different companies) of long straddles per month was +25%.

Best Picture: After trading the long straddles for a while and gaining some experience with them, I eventually became a "Big Picture" person. I came up with the conclusion that an easier way of managing the monthly basket was to constantly monitor the overall value of the entire four company Basket every day (monitor P/L on trade station on all open positions in the entire basket.) Many months when the entire basket value reached +25%
above the debit for the entire basket, I would simply dump everything and take the +25%.

Gimpyron · Apr 20, 2016

Hey Jeffalvinson, thank you for interesting share of your knowledge,
by this lines:

jeffalvinson said:
Best Picture: After trading the long
straddles for a while and gaining some experience with them, I eventually became a "Big Picture" person. I came up with the conclusion that an easier way of managing the monthly basket was to constantly monitor the overall value of the entire four company Basket every day (monitor P/L on trade station on all open positions in the entire basket.) Many months when the entire basket value reached +25%
above the debit for the entire basket, I would simply dump everything and take the +25%.
More...

Do you mean that you still go long straddle before earnings, the only change is you trade them as one unit until you reach your +25% goal or stop loss?
Are you doing this from the 90's?? why specific 4 stocks?
I mean, if your system works, why not using larger diversification?

ironchef · Apr 20, 2016

jeffalvinson said:
CBC, its actually a good strategy to close out 1 leg after that trade has doubled in $$ and hold the other leg as long as possible, instead of just closing the whole trade out.
You basically have a free trade at that point, so any positive gain in the leg that is left open
is pure profit. I traded long straddles in the 1990's for a couple years.
Here is the setup I used that made money every month I did it:
1: Pick a basket of 4 companies that are about to report earnings in the next 2-3 weeks and their stock prices are in the "middle" of a "trading range" (use a 6 month daily candle chart with a price channel (20) indicator to determine if the stocks are in a trade range).
2: I only picked stocks that have low volatility and have cheap ATM or slightly OTM options with 2 months left before expiration.
3: A single Call/Put pair combined cost (total debit) was in the $200-$350, not to exceed $350.
4: As the stock moved closer to its earning announcement day, the implied volatility of the
options in the straddle normally increase in value because of trader anticipation and expectation
of good or bad earning). This increase in IV (implied volatility) help to counter-act the normal time decay of the options.
5: If I didn't have decent profit after the earning announcement, I would close the entire position. Under no circumstances would I let the total dollar value (total debit) of put/call straddle fall below -40%. Because I bought 2 month options, . I would always close them out with at least 30 days left to expiration. So essentially there was a mental stop (-40%) and a Time Stop (30 left to expiration on a 2 month option) whichever came first.

Interesting Note: (My Best Long Straddle Trade Ever)
In 1999 one of my long straddle's was on the Clorox Company. The straddle cost (total debit) was approx. $340 per pair (2.00 calls / 1.40 puts).
I held the straddle for 2-3 weeks before its earning report. Its was suppose to announce earnings in the AM before the market opened, but after the announcement the stock was halted and didn't open until 11:00am that day! The stock price was $110.00 when I bought the long straddles and when it finally opened on earning's announcement day at 11:00am,
the stock price opened at 82!
The calls in the straddles were worthless, but the puts opened at 16.50!
I sold the puts at $1,650 per put for a total profit of +$385% per straddle.

No two straddles ever worked out the same. Some doubled on 1 leg so I would hold the other leg and finally sell it anywhere from +25% to in rare instances +100%.
The Clorox trade was an anomaly.
My average returns on the entire basket (4 different companies) of long straddles per month was +25%.

Best Picture: After trading the long straddles for a while and gaining some experience with them, I eventually became a "Big Picture" person. I came up with the conclusion that an easier way of managing the monthly basket was to constantly monitor the overall value of the entire four company Basket every day (monitor P/L on trade station on all open positions in the entire basket.) Many months when the entire basket value reached +25%
above the debit for the entire basket, I would simply dump everything and take the +25%.
More...

I appreciate your post. I learned something new from you.

Regards,

jeffalvinson · Apr 20, 2016

Gimpyron said:
Hey Jeffalvinson, thank you for interesting share of your knowledge,
by this lines:

Do you mean that you still go long straddle before earnings, the only change is you trade them as one unit until you reach your +25% goal or stop loss?
Are you doing this from the 90's?? why specific 4 stocks?
I mean, if your system works, why not using larger diversification?
More...

I did this from the 1990's up to 2000-2001.
Here is my reasoning for buying 2-3 weeks before a company announces their earnings:
When you buy lower priced ATM (or slightly OTM) options that have 2 months left before expiration and you are limiting your total call/put debit (total cost of the call and put) to
$350 or less, and those stocks price's need to be in the middle of a multi-month trade range.
1: "There is going to be a very limited number of stocks that meet all those requirements above."
2: When I was doing it, I would have to search night and day for weeks to come up with a new basket of 4 stocks each month. It was a lot of work for a 25% return on the overall basket each
month.
3: And then to monitor each individual straddle in the basket all day, everyday for a month
while still trying to research companies for a new basket next month, it became overwhelming
as I got older. That's why after doing it for a while, I decided to just watch the overall P/L meter on my trading platform and dump everything when the entire basket as a whole hit +25% profit.
4: You could probably find a lot more stocks for a larger basket with today's more modern tools on the current trading platforms.

I should mention that at 67 years old, I don't have the health or time to do all the research
or monitoring to trade these straddle baskets anymore. It works "but" its a lot of work!

If you want an example of what kind of trading I do now (since the early 2000's), type in the Elite Trader Search box: Purely Mechanical Option Trading Part 2
and in the "Posted by Member box type: jeffalvinson

CBC · Apr 21, 2016

Thanks Jeff. I traded straddles for 6 months and only dreamed about that trade u landed.

I think u could setup a bloomberg terminal to look for ideal stocks. Dunno if it justifies $75 K tho.

I appreciate the thoughts. I'm thinking that it might be a good strategy if 1 leg gets closed out in a short period of time because I will have more time left on the other option. On the other hand, if the trade lingers for a while I might just close the trade out. I'l have a read through ur mechinical optinos thread.