Strangling TASR...and some basic questions

Discussion in 'Options' started by Tazer, Apr 24, 2004.

  1. Tazer


    Hi all -

    Long-time lurker, first-time poster. This place rocks.

    I'm considering a strangle on Taser (no relation to my screen-name ;) ) and was looking for some insight from some of you options experts.

    The set-up:
    TASR has traded three Inside Days as the stock settles down from its earnings-related whipsaw. The narrowing range could foretell a large breakout/breakdown. Odds of another big price swing seem pretty good.

    My expectation:
    Shares will break out of this consolidation phase and make a 15-20 point swing in either direction within the next few weeks.

    This looks like an ideal strangle set-up to me. Let's assume I bought two options that are roughly 15 points OTM:
    95 Call - 4.30
    65 Put - 3.30

    The way I see it, there are at least two potential ways this trade could fail: a.) Either the stock continues its sideways trading for several weeks, or b.) TASR does what I expect, but not before time decay and/or decreased volatility eats away at the premiums.

    It seems to me that the recent narrowing range should have already brought implied volatility down a bit . How can I put this assumption to the test? Also, is there any way to determine how much of the premium is time value, and how much is due to the high volatility?

    And more generally, what are your thoughts on this set-up? Would using different strikes be more effective? Is the current implied volatilty so high that the odds would be stacked against me from the get-go?
  2. Vols are still high... I think you'll touch either strike, but it's still a fairly low-gamma(leverage) play relative to the premium at stake.

    Straddles/strangles have a razor-thin margin of error. You need an increase in volty or a large move to the strike, quickly, or the -edge will accumulate and you'll be a weak-holder looking for the exit.

    Buy a call and put backspread(wrangle) -- short the atm straddle// long 2*otm strangle. Far better gamma/theta position, and not nearly as sensitive in vega(nearly neutral).
  3. Vol's too high. Instead, I'd buy two front month flys, one at each price. It's a cheap way to play your expectation with a favorable Greek profile.
  4. Tazer


    << TASR has traded three Inside Days >>

    Errr...make that two Inside Days.
  5. two-for-one split coming on TASR end of this week, so be careful-- open option positions will double in size while strikes will halve.