Strategy For Unknown Direction

Discussion in 'Options' started by infolode, May 27, 2007.

  1. I've never traded options before so please bare with me.

    My question is as follows: What strategy would I employ if I know the approximate date a stock will break but am unsure as to the direction?

    XYZ stock is at a pivotal point and I know it will either break support or ramp up and double.

    This isn't about a earnings coin toss, it's more about the instruments cycle turn.


  2. da-net


    a strategy that i use when trading gbp/usd at news releases is;

    1... find the upper and lower limits of the channel it is trading within a buy order for a break above the channel with enough room for confirmation
    3.... place a sell order for a break below the channel. again with enough room for a confirmation
    4....remove whichever order was not executed a stop loss order just in case it was a whipsaw move

    sometimes i will place an order for an additional lot size of the original order at the point of stop loss so that i will be in the trade on the correct side

    allowing enough room for confirmation usually has me in the correct side with lower profits but with more protection
  3. Thanks, but I was looking for a strategy with the usage of options.

    Take google for instance, it's at a critical junction now. 460 is the pivot so it's either 560 or 350. It’s position now easily points to a $100 move either way. Should we spike up to 1580 S&P this stock would go to $565 so $495 is the key level to watch and it’s a good market proxy. A failure now could mean our 1526 S&P double top from the close in 2000 was the high.
  4. Take a look at short calendar- or time-spreads.

  5. nikko309


    In addition to when, it also depends on the magnitude of the move that you expect.

    The simplest strategy is a straddle. They tend to be expensive and they lose on both sides due to time decay. On an expiration basis, GOOG must move past either strike by the amount that the straddle costs (less if sooner).

    You can lessen the "go nowhere" risk by doing a strangle but you'll still need the same move (or more) to go into the black).

    You can modify the risk/reward graph by considering butterflies and condors. For example, you could buy the straddle and sell a strangle that's 20 pts out on either side thereby lowering the maximum risk in return for capping the max gain. Lotsa possibilities... you'll have to play with them to find one that's in your comfort zone.

    Hmmm, dya mind if I keep my clothes on? :)
  6. 1st. google "Cottle slingshot"-a strategy involving long strike 1 and short 2 or more higher verticals.

    2nd get "Market Wizards part ?. It has the interview of John Bender which you might find interesting.

    3rd. Look up short calendars with staggered strikes, nice payooff window. ex. Long Jan 50 / short Feb 55c
  7. There are pros and cons to all these suggestions. Buying a straddle would be the obvious choice, but you are exposed to not only time decay but also volatility crush. Long a backspread is another option.

    Natenberg's book Options Volatility and Pricing explains all this in great detail.
  8. Thank you all for your suggestions.

    I've invested/traded for years but have never studied and used options due to ignorance.

    Obviously, I need to devote myself to study the nuts and bolts of options. I'll get the suggested books this week.

    I know it won't be a 'walk in the park' never is.

    Same arena; different game.

    Good Trading Gentlemen,


  9. LOL I appear to be a spelling dolt.
  10. nikko309


    How about a double slingshot?

    Suppose there's an earnings announcement coming up in a week or so. I expect some pre earnings IV increase and in that time, there could be movement to either side. Some of each could be a good thing. Obviously, I could not hang in through earnings since IV collapse would hurt my excess long legs.

    D'ya think this might be viable under these circumstances?
    #10     May 28, 2007