Questions for experienced option traders

[ali4rmlondon]

Guys, Im new to options. Ive been reading a little on it. Just know the basics and looking forward to learning from you experienced traders.

I would like to ask: is anyone here doing well using the straddle strategy. If you choose a volatile option then at times of low volatility cant you just open a call and a put. It would go one way or the other? Can this work?

Regards

 

[mmone]

ali

that is why a straddle is considered a vol trade..if you buy at low vol and vol goes up then of course you will make money..or if the underlying moves far enough than you will make money also

you will always make more money on the downside move as traditionally vol will rise when market drops (and vice versa)..research skew if this does not make sense

the thing working against you though is time decay in being long options..similarly when you say you buy at low vol what is to say that vol is not pushed in your face further reducing the value of your straddle? remember you are putting on a position that has upside and downside

in response to earlier posts, there is no such thing as a free lunch in options trades whether it be writing out of the money put or buying deepy calls

who would sell you a deepy call for less than intrinsic? only someone who is closing out a winning position normally and market makers will be all over them quicker than a fat kid on a cupcake

the only other way an opportunity would arise here is if one persons pricing model differs so much with anothers that the trade looks appealing to both parties but only one will be right..but both will price the option as intrinisic PLUS some amount of time decay so it can never be more profitable to buy instead of the underlying (as robertral said)

 

[sachuc]

in article recommendation I read aboutshort iron condor recommendation it says
"bull spread: 2700c short 2800
bear spread 2600p short 2500
combine the 2 spreads and one or both are likely to be hit "
I think getting hit means one or 2 spread are going to be reached once one side of range once other side I

just cannot understand how specfically how when at what levelshould one sell that spread before expiry
Sach

 

[anley]

Guys, Im new to options. Ive been reading a little on it. Just know the basics and looking forward to learning from you experienced traders.

I would like to ask: is anyone here doing well using the straddle strategy. If you choose a volatile option then at times of low volatility cant you just open a call and a put. It would go one way or the other? Can this work?

Regards

Yes, it can easily work but only if the price of the underlying moves considerably. But who says it will even if the underlying is hostorically volatile?

Look for example what happened to volatility from say 2004-2007 it shrunk and shrunk and shrunk. So the straddle or stangle buyer woul have lost, lost, lost for around 3 years. Then bam, he would have hit it big from summer 2007 onwards, but would the trader still be buying straddles, or would he have either goen broke or suspended doing the trades.......

If making money in trading is hard, making money in options is about 3 times as hard unless you're doing it for a living even then it's far from easy.

 

[option911]

Euro, that is a great suggestion optionexpress and think or swim have GREAT paper trade accounts. Also, I would really suggest reading, reading, and reading. Read The Natenberg book, read the black swan. Go to the CBOE options institute and watch all of their free stuff as well.

Mark
Option 911 Blog

 

[Calinor]

I would advise against trading options too for many reasons (why do you want to?). When you buy an option, you are paying a spread of course, and essentially if a bank was selling you that, they can hedge that option by just buying and selling the underlying so that they have no risk (there is also a hidden premium in the volatility, but not important for this argument). The two positions option and underlying are equivalent (delta-hedging). So any standard option position is the equivalent of a sequence of positions in the underlying. To actually make money with options, you still have to know either which direction it is moving, or you have to know how much/quickly it will move in a given time (or both!). If you can do this, surely you can make money just trading the underlying.

When you say "straddle strategy" do you mean an actual strategy you have using straddles or do you mean the straddle option? These options are quite standard, so there is no free lunch there. What analysis are you looking for? The formulas for pricing options are not that hard, the problem is the inputs, in particular volatility. There is a market implied vol, and there is a historical vol. The first is easy to find, the second has many methods for estimating. There is a possible opportunity to make money in options if someone has mispriced an option by having the wrong value for the volatility. This opportunity likely won't last too long because of arbitrageurs. Any analysis you try to do on this, is probably not going to match up to the pros. I don't believe you can gain an edge with options unless you already have an edge with the underlying stock/index.

If you are determined in this, I'd recommend reading
"Option Volatility & Pricing" by Natenberg. Things are nicely explained in that book, and most people will be able to understand it. It is written in an easy style. If you're a math guy, you can read Hull, but Hull carries too much information and isn't for most people. Understand it as best you can before you consider trading it.

 

[jamoola]

I would advise against trading options too for many reasons (why do you want to?). When you buy an option, you are paying a spread of course, and essentially if a bank was selling you that, they can hedge that option by just buying and selling the underlying so that they have no risk (there is also a hidden premium in the volatility, but not important for this argument). The two positions option and underlying are equivalent (delta-hedging). So any standard option position is the equivalent of a sequence of positions in the underlying. To actually make money with options, you still have to know either which direction it is moving, or you have to know how much/quickly it will move in a given time (or both!). If you can do this, surely you can make money just trading the underlying.

When you say "straddle strategy" do you mean an actual strategy you have using straddles or do you mean the straddle option? These options are quite standard, so there is no free lunch there. What analysis are you looking for? The formulas for pricing options are not that hard, the problem is the inputs, in particular volatility. There is a market implied vol, and there is a historical vol. The first is easy to find, the second has many methods for estimating. There is a possible opportunity to make money in options if someone has mispriced an option by having the wrong value for the volatility. This opportunity likely won't last too long because of arbitrageurs. Any analysis you try to do on this, is probably not going to match up to the pros. I don't believe you can gain an edge with options unless you already have an edge with the underlying stock/index.

To be honest it seems you don't understand options very well. A straddle is buying a put and a call at the same strike price, hoping to profit from a large move in the underlying stock price.

Your assertions that you "have to know either which direction it is moving, or you have to know how much/quickly it will move in a given time (or both!)" and that there are no other advantages to trading the underlying if you can do that are not true. I can sell an option, buy a cheaper option and if they both expire worthless (which can occur with NO move in the stock) I make the difference. I can also sell a put for more credit and more risk, or sell a call for a similar, unlimited-risk position to shorting stock, and construct "synthetic" long and short positions.

Iron condors are a strategy that profits off of little market movement, along with calendar spreads and diagonals ( diagonals are my favorite because of the highest probability of profit). Tell me how I can make 25-30% of my risked margin a month on a stock (or any other optionable product) by just taking a position in the stock and it moving nowhere.

You can also buy a call and sell a cheaper one to lessen the cost of your straight option, while capping your upside.

All of these strategies give me more leverage than stock positions.

To those worried about spreads, most major index options, the SPY, DIA, and QQQQ ETF options, and most of the large cap stocks (think S&p 100) trade within .5 spreads. It is true that spreads widen faaaaaaar on very illiquid options.

I suggest reading thinkorswim's options guide to get an idea of what you can really do with options.

 

[Calinor]

I understand options very well thanks 🙂

"A straddle is buying a put and a call at the same strike price." Yes. If you look at the payoff from a straddle position, then you'll realise that the only way this becomes profitable is if the underlying MOVES to one side or the other an AMOUNT more than what you paid to set up the straddle BEFORE MATURITY (yes I know you can trade it before maturity, but its moves are highly correlated to the underlyings for obvious reasons). So look at those things I typed in capitals, and realise why I said, you either need to know which direction the underlying is moving in OR you need to know HOW MUCH (AMOUNT)/HOW QUICKLY (BEFORE MATURITY) it will move. It is no good having a straddle on a stock that doesn't move, and it is no good having a straddle on a stock that moves after maturity. Both of those give you nothing. And the longer you are long an option like that which isn't moving, the more money you lose since options have a time decay (theta). So clearly you would want something that moves, and it would be nice if you had an idea about when it is likely to move. If it is a standard option (call or put), then you would profit if it moves in the direction up/down (call/put respectively) before maturity. So for some standard options, you will want to know the direction. Is it clear yet? In any case the option can still be made up by investing in the underlying. If you believe not, then ask all those option traders why they keep delta-hedging their positions day after day so that they have no risk.

If you don't know how you can hedge standard options using just the underlying, then you don't know about options. There are advantages to options sure, they are cheaper than the underlying for example (not sure this is better for a new trader). You talk about risk with options and unlimited risk. This is not something I would recommend to anyone even with my limited trading knowledge. So since the opening poster looked for advice, saying unlimited risk as if it is some sort of advantage is not wise. You can make profit with options if you know what you are doing, but you can make profit with the underlying if you know what you are doing. The latter is easier in my opinion though I could be wrong 🙂. I know how to price options, I know how to hedge them, I know the delta , gamma, rho, theta, vega and I know Black-Scholes option pricing theory as well as anyone here. I know how they behave and what is important, and I would not trade them for my own account. You are welcome to disagree, I still don't believe anyone starting out should trade options. And I also believe that if you can make money with options, you can make money with the underlying. Those are just my opinions.

Question for you jamoola. If I believe a price will move out of a range (as in the straddle). Could I not just wait for the underlying to move above/below that range and then go long/short? Sure it could reverse and I lose a bit, but then it is back in the range - and so I lose a bit, and that means my option would be back in the range - and so I'd lose a bit.

 

[jamoola]

I understand options very well thanks 🙂

"A straddle is buying a put and a call at the same strike price." Yes. If you look at the payoff from a straddle position, then you'll realise that the only way this becomes profitable is if the underlying MOVES to one side or the other an AMOUNT more than what you paid to set up the straddle BEFORE MATURITY

Don't get too excitable with the caps, yes I already know this. When you trade options, the price of a contract is a premium and you have to add or subtract that from every profit/loss equation. Notice I said my favorite strategy is diagonals? I hate straddles! All I said is it's buying a call and a put. I'm never going to pay premium 2 times, and I think blindly trying to buy both and hope one makes money is dumb, although it may be suitable for some people who want to play around uncertain earnings.

I'm also fairly familiar with the concept of theta, delta, and gamma although not to the point of exact valuation, but how they behave, get Vega somewhat, and don't understand Rho as well as I should. Again you seem to think I want to put on a straddle simply because I said "A straddle is buying a call and a put", which you clearly know, and I didn't understand from the first post.

I still disagree with your reasons not to trade options in the previous post, but you seem to know them.