Ohhhh! I´m sorry, I didn´t realize it was of interest here. I´m holding the 58 Sept. QQQ long straddle spread at $3.90 at 2 contracts. In my cash account. It is already profitable. But I´m waiting a bit. I´m basically waiting until it goes to two strikes as a move. Or the 56 QQQ strike to exit. The market moves about 1.5 strikes in a weekly bar of the QQQ. Break even is about 75 ticks, but is variable depending on the IV effect. I decided to enter because this was a bear trend and volatility is higher in a bear trend and there was a chance of IV expansion. When the market goes up, IV usually shrinks and you can lose. I am also holding another PAPER trade long strangle at the beginning of this trend, this was the 58 call and 59 put at a $4 spread. Since IV is all important, I expect to close this paper spread, put on at 58.80 QQQ in two strikes. Which would be 56.80 QQQ. When I entered, it was asking 3.91 for the 58 straddle spread and I bid 3.90 and it took about 45 mins to fill. Went up to 3.97 or so. before coming back to my bid. I didn´t really have any particular reason for buying it, other than the price was fluctuating around the 58 strike. Otherwise you have to buy a long strangle. I did expect a downward move on the market, but that would be irrelevant in a long straddle. Since they are non directional. I just expected the market to move, probably down, but up would be okay as well. From my minimal experience, straddles and strangles are delta neutral trades. Delta does not change. I´m still not completely clear on the effects of IV, as the spread premium shrinks or expands with IV, and the ratio is not clear to my mind as to how to handle this intuitively. I do not expect to lose, it is just a question of how much will I gain, or how long do I have to wait. Since this is Sept options, or 8 to 12 weeks to expiration. I have plenty of time. Couple of weeks anyway I expect and somewhere in there I should get hit by a semit trailer truck full of IV. Or I get the profit from market movement.
When you put it on it is delta neutral. You are hoping that either IV rises or that it moves a lot one way (increasing deltas) and profit. The more it deviates from the center, the more deltas it is. You mentioned dropping the losing side on one of your long winded posts, but maybe that was another strategy?.
Edudamon Yes, that comment on dropping the losing side is a different strategy coming from Forex Forex. The time frame in that trade is measured in an hour, to four hours. I will try it again this week and see what happens, using a paper trade.
Which is why this Wednesday morning I opened another column of my recording volatility changes. I mark this one for VEGA for the above strategy. Essentially I´m interested in if VEGA can forecast direction before the trade is put on. I don´t really have any record of VEGA actually changing in a long straddle in my previous GREEK recording. Which was either one or two weeks only. So will do it again. On the comment sometime past, that " VEGA hurts if going UP and HELPS if Vega is going down". I´ve been thinking about that. Trying to understand what was being said and happening. Since VEGA is the number representing the SPEED of Implied Volatility. I take it you would check VEGA on either Calls or PUTs and my interest and theory is in seeing if there is a change in VEGA before I put on a Long Straddle for a quickie trade, which would indicate which way the trade will go. IF that works and that is a BIG IF, then I would be able to close the losing side faster, preserving more money of that side. The reason I mention this, in my last week trade doing this, I believe I started out the long straddle with .42 cents on the CALLS and by the time it dropped to .13 cents, I closed it out. It turned out the profit in that quickie trade was the .13 cents that I had saved from the losing side. Otherwise the long straddle trade would have broke even, or lost money. Only one sample, insufficient to draw conclusions from.
Howard I thought about your Management plan remark. Never thought about it to tell the truth and wouldn´t even know where to start. I´m still floundering around trying this and that, to learn the nuances of the Long Straddle/Strangle. If there is a goal, it is to start compounding like you do in credit spreads, once I can perform trades successfully in a way I want.
Okay lunch time Wednesday. Been in that Long Strangle, long enough, paper trading. This was put on when the index of the QQQ was at 58.80 and has made a small profit two times already. So decided to take it. Strangle was for a spread of $4.00 cost and closed it at $4.33. Making .33 cents. .33 x 200 = $66 minus $25 commission, = net of $41 profit. Capital used was $800, divided by $41 = 5% return. It was put on July 7th and held for six days.
Been in a paper trading directional 2 Contracts Sept 59 PUT. Since last Friday. Decided to close it out as well. Got some profit. Bought for $2.06, sold for $2.60 = + .54 cents .54 x 200 = $108 - $25 commission = +$83 net profit $83 / $412 = 20 % gain -------------------------------------------- Left holding one trade, the CASH MONEY long straddle, Sept 58 QQQ at $3.90 and holding. _________________________________________
Straddles are difficult trades. They're difficult to buy (vol and decay) and hard to short (haircut and URO). Attempting to isolate vol (realized > implied) will require dynamic hedging and assumes that you don't miss your spot hedges. You can blow-out being long or short a straddle. I know a guy who was long thousands of CL straddles and missed some hedges by a few ticks and was pinned to the body at expiration, losing millions in the process. I would only trade long straddles directionally unless you're looking to make an outright bet on vol and can implement the hedging. Go long the 25-delta straddle when you're bullish the market. You will win on deltas and skew, but lose on strip-vol. If bearish, you buy the -25-delta straddle which will profit from delta and strip vol, and lose a bit from skew. I would recommend the straddle as one trade to avoid. Dynamic hedging in spot or options is not going to earn much on the spread between implied and realized. It looks great on paper, but the $req on the dynamic hedge makes it a poor proposition in most cases. Many do not run the maths on what a 300bp spread on RV/IV will translate into $. More often than not it's not worth the effort.
Thankyou Atticus Some of that is over my head at the moment. But I did get the business of buying a long straddle at + 25 Delta and buying a Bearish direction long straddle at - 25 Delta. Using the Long Straddle as a biased directional trade. I´ll put that in my notes, for something to try paper trading and see what I can learn from that. It is certainly outside of my beginners box thinking of only buying Long Straddles around the ATM. I´ve wondered a bit on the Long Strangle. I have been doing the Strangle with both sides ITM. Can´t remember why I figured to do it that way. I´m wondering if I am right? Or should it be OTM Strangles? Which is better.
That's a "guts" (inside) strangle. You can't lose the strike-differential, so best to simply buy the same-strike "otm" strangle (outside) as they are truly equivalent, but the otm spread may be a little tighter.