What is best strategy to adjust a Straddle

Discussion in 'Options' started by johnmarg, Feb 26, 2010.

  1. johnmarg

    johnmarg

    I have seen 2 different strategies for a straddle when the underlying stock goes up or down a strike.
    1. Lawrence McMillan in his book says if it goes up then sell the long put and roll it up a strike. You do the opposite if the stock goes down. You pay a little extra but are assured the value of the strike no matter what happens next.
    2. All other books and posts I read said if the underlying goes up you sell the long call and roll it up a strike.

    I cant decide which is best to use. Anyone know?
     
  2. It depends. Rolling the put up will be better if the UL reverses. Rolling the call up will be better (or at least less worse) if it continues up.
     
  3. why not just add another straddle over the top of it?
     
  4. Premium

    Premium

    If you're rolling to the same strike price with both methods, it should be almost the same since both methods are equivalent. For example, if the stock goes up one strike, you would roll either by buying a vertical put spread (in method 1) or by selling a vertical call spread (in method 2). Maybe purchasing the put spread might be better in terms of fills because you're dealing with an OTM option rather than an ITM option.
     
  5. charts

    charts

    Any option strategy will work only if the reasons for which you opened it are confirmed. Any subsequent adjustment will work only if the reasons for which you do it are confirmed. There's no universally good or bad strategy or adjustment. If you don't have a good reason to open or adjust don't do it! Have a plan that cover all the possible outcomes before you open any position, and stick to it! Don't make adjustment decisions based on your P&L! etc. ... etc ... :)
    PS: All option strategies available to the ordinary trader have negative expectancy.
     
  6. if you continue to buy more and more options and continue to pay premium, you are going to get hurt.

    IMHO, once you buy options, your major objective is to pull out cash and reduce risk.

    Mark
     
  7. and what about if you are selling? surely this must be a strategy that can be employed to help avoid an IC moving into the red when the UL makes a big move..
     
  8. First off, my oops for my previous reply. I misread the question and thought that you were asking about a short straddle. My bad.

    You're an evil person. You made my head hurt! It doesn't matter which side you roll because the net delta will be the same either way. Therefore, the result after the roll will be the same regardless of which roll you did (same P&L).

    Whether the roll was a good idea is dependent on what the underlying does after the roll.
     
  9. There is no "best" methodology for adjusting a straddle. You have your risk tolerance and profit objectives; other traders have their own. That being said, it's wise to try to find your own "best", as you're doing here.
     
  10. johnmarg

    johnmarg

    Thank you Spin Dr and Elite. Good advice. I didnt think there was any difference in the strategies but will have to keep paper trading them.
     
    #10     Feb 27, 2010