1. close out at a loss. 2. roll the front month (you'd probably be at 80%+ profit it on it in this type of event) into the next month 3. double down on your long call never have too much of your cash at risk in case of one of these events. market crashes are incredible buying opportunities.
just realized you asked what would happen and not what would you do. i'd imagine your short call would expire worthless and your long back month call would lose half it's value.
I´m enamored of strangles and straddles. I´ve heard from two people who are making money at it. So still seeking the TRADE SECRETS of how to do it. Far as I can figure, there is the standard way and a second way. The standard way earns about 3% a month net. I´m not finished experimenting with the second way yet. I´m still trying to fix it with bells and whistle, tweeks and stuff. But figure it should return 10% a month. Much of the criticism coming in, apparently is because people are trading front month and second month options in a straddle or strangle. I´ve learned you need to trade 90 day straddles or strangles. I´ll at least pass that on to you. ( GRIN ) The big thing with this type of trade, is there is NO RISK. Very slow conservative, neutral strategy. Takes about two weeks to a month, depending on market movement via lady luck, to work your way of a strangle or straddle. I´m in a big cash straddle right now, ( for my current account level ) to see how my theory works out in reality. Done some straddles before but the old fashioned way. They work but very slow. I am also doing a lot of experimental paper trading on many other classical strategies. They do make money. But there is alway some RISK. That is the difference between anything else and the NO RISK straddle/strangle. Other strategies mostly to do with selling premium, have to consider risk and so they trade a smaller portion of their equity account. These make more money, faster, but carry risk. Because of the trade off, between RISK strategies seems to be a balance of trading smaller, it takes longer to increase the equity balance. I´m getting into my theory implications here right now, as empirically I am in the process of doing it and no hard results in hand. Listening to reports on here, about results for annual RETURN ON INVESTMENT ( ROI ), I hear people claim anywhere from 30% to 300%. Larger returns carry more risk and often blow up, they certainly have drawdowns and losses. The MARKET WIZARD book claim a 40% return ROI for a year, is a top reward ratio to shoot for. One correspondent friend claims a 60% return per year, ROI. The trade off for a straddle / strangle seems to be NO RISK, vs RISK, but higher reward by anything else. I´m a novice amateur so my thoughts are not necessarily correct here. Take WARNING! My thinking, not yet backed up by real life, is that a straddle / strangle can return 30% to 100% per year on your equity balance. The trade off balancing act is that with a NO RISK strategy, you can trade ALL your account each time. What we call COMPOUNDING. Whereas those that are claiming 50% or so ROI, have to allow for RISK and trade smaller amounts of their accounts, to cover losses. I´ll toss those speculative thoughts out for comments. This is at the moment only theoretical thinking and I´m just starting on the process of proving I´m right with REAL MONEY TRADING. The FUTURE KNOWS. I´d love to start with a $200,000 in a NO RISK STRATEGY, because you probably could live off it as income?
well, if you're just buying a straddle or a strangle then the risk is the premium you pay for the long options.
In one sense you are correct. But what is the risk of you losing your premium? Far as I can see with 90 day options trading in QQQ, any loss is zero. The QQQ moves 5 strikes in a month, or four weeks, or 20 days. It takes in the standard straddle, or strangle, about 3 strikes to make the move profitable, however small. Usually at the same time as price movement there is a volatility spike that allows you to exit with a profit. This is presuming you are working on the standard application of a straddle or strangle, which is the change in the SPREAD. There are other ways, at least one, of working that same trade. You have three months, monthly bars themselves alone are enough to make a profit. But even so, multiple monthly bars, will move even further away from the original straddle and give you your profit.
i'll let some of the more experienced guys on here explain some of the more advanced theory in calculating these options. but for one thing, the value of your long options decrease in value every day due to theta. the QQQ might move 5 strikes every 20 days, but unless it does this the very next day or week, the value of your spread will decrease on a day-by-day basis. the strategy of the straddle or strangle is trying to capture that move in a short enough amount of time to where the remaining value of your long options are still profitable. don't forget that almost 90% of options expire worthless.