Long Straddle

Pete D June 27th, 2016 at 10:22pm

That is so funny! I have long call in ANF!
So far you're trade is winning. I should have close it on Thursday, the Brexit Day. It was mistake to wait for more profits after the results were in.

Good luck to you too.

Peter June 24th, 2016 at 8:09am

No worries, happy to hear about others experiences...it helps my understanding too!

No, I think I will take some losses today. I have long calls and long puts across 10 stocks, a covered call (VIAV) and short stock/long put (ANF). I'm worried about the covered call as I will take losses as the market sells off without any protection.

I have a long $7 July call in RBS that I bought for 0.30, which was trading at 0.84 yesterday. Pre-market shows RBS already down 24% to 5.71...so that call will probably go to zero today.

Hopefully the long puts I have make massive gains...but I don't think any of the stocks will sink as much as RBS. Too bad I guess....good thing that my positions are small so it's not too depressing!

Good luck to you too!

Pete D June 24th, 2016 at 1:02am

Hi Peter,

Thanks for your input, I appreciate it.

I was between rock and the hard place, in regards to these Straddle trades. It appeared, prior to the Market opening, that I'd make some profit in the last two examples, but the option prices were lower when the Market opened. So, at the open I already looked at the loses. Not to big, though, but as the trading was progressing and stocks moved lower and lower, the losses piled up. Bad luck.

I'm glad that from the trading point of view I did something right, even though I had losses.

I hope you have some protection in the market. It's looking ugly and maybe it's just the start.
I'm going to have some limited losses, but some trades are hedging the down move, so I hope some $$ will be recovered, if not all.

Thanks again and good luck!

Pete

Peter June 22nd, 2016 at 7:47pm

Hi Pete,

A1. The amount of decay isn't linear. It's magnitude will be determined by the option's moneyness, time to expiry and implied volatility. I.e. an option that is out of the money, that is close to expiration and has high implied volatility will have the most decay. If you buy an option with these characteristics, you will need the stock to move by a lot in order for the option to be profitable in the short term.

What can happen, as you've described, is that the stock moves in your direction but the movement isn't quite enough to overcome the effect of time decay. You can read more about this here;

Time Decay
Option Theta

A2. Mmm, yeah this is a tricky one and hard to say without all of the information. Of course, in hindsight, you could say that you should have exited the position at a profit but it isn't always an easy decision. Once the position moves in your favour, you might be optimistic that it could continue higher, especially after a favourable earnings announcement, but as you've seen the stock has pulled back afterwards.

I guess you also need to consider what's acceptable in terms of profit and risk. When the position was immediately profitable, that might have been a good win for you and maybe you could have take it. But on the other hand it seems that you had more appetite for gains and were willing to risk those gains for further gains. This is what the game is all about.

I have been struggling with this myself the past week. I had a bunch of positions, a few of those were immediately profitable but I decided to hold onto them until expiration, expecting those to continue to gain. However, all of the June 17 options I had outstanding turned out to be losses. From now on, I will be more considerate with those that experience large gains early and will probably look to close those out, especially if they have doubled or more in profits.

A3. Yes, I would have done the same in this case. With the options expiring that day you are likely to experience a lot of decay as the day nears the close. Plus, you wouldn't want to leave it expire as one of the legs will be in the money, which means you will be exercised either take delivery of a long position or a short position.

Let me know if these answers make sense or not and if you have any other questions, let me know.

Peter June 22nd, 2016 at 7:22am

Hi Pete,

Apologies, I've been traveling the past two weeks so have not had a chance to reply. I will review and come back to you shortly on this.

Pete D June 17th, 2016 at 8:09pm

Hi,
I have a questions about managing and exiting Long Straddle trades.
Recently I traded a few of them and even though it looked like I should make a profit it was actually a loss.
Here are the examples.

1. LULU, Jun10 expiry. Straddle (4 contracts) was established ATM on June 3rd. Earnings report was scheduled for June 8th before the market.
On June 7th I sold and purchased Straddle again, to be ATM again.
Q1. Was this a good idea?
I thought it was, but after the report was out LULU didn't move much, about 3%. So, I closed the Straddle with the loss. If I left the original Straddle I would still lose but it would be much less.

2. GBT, Jun17 expiry. Straddle (2 contracts) was established ATM on June 9th. GBT drug trial announcement was scheduled for June 10th early in the morning.
After the announcement, in pre-market hours, the stock shot up 30% and by the market was open it dropped to +25%. Then it continued to go lower and lower, with one short small bounce during the first hour of trading, and then continued to go lower and lower.
Q2. Was I suppose to close the Straddle right at the open of the market, seeing that it never made higher than the opening gap in pre-market hours and starting with the red candle right away? Or I was to wait a bit for dust to settle, as I did?

3. SWHC, Jun17 expiry. Straddle (8 contracts) was established ATM on June 15th. Earnings report was scheduled for June 16th after market hours.
After the report SWHC was up 7-8% and it held in the after hours trading on June 16th. This morning it continued to go higher in the pre-market trading and reached about +10%. However, it started to drift lower and lower right at the opening of the market. When it dropped below the mark of yesterday's gap up, during the first half hour of trading, I closed the Straddle.
Q3. Was I suppose to wait to reach this mark or it was better to close it right at the open because the price was moving lower from the pre-market high, during the pre-market trading?

I'd appreciate and value your feedback.
Thanks,

Pete

Peter November 13th, 2014 at 3:43pm

Hi Anantha,

If the straddle is using ATM strikes, then the premiums should be close - they probably won't be the same as the forward price of the stock may be slightly higher than the actual strikes used, but the premiums should still be close.

But, straddles don't have to be ATM; you're free to choose whatever strike suits your ideas. Most are ATM though...

Anantha Raman November 13th, 2014 at 4:44am

In long straddle is it important that the premium of call and put should be same?

Anantha Raman November 13th, 2014 at 4:43am

Naga,
your strategy is called long strangle.

Peter August 25th, 2014 at 4:23am

Hi Jaycelle,

The total cost of a long straddle is 0.042.
The Breakeven points are 1.058 and 1.142

For a long straddle with the underlying trading at $0.90;
- The call option expires worthless
- The put option is worth 0.20
- Your profit is 0.158 (0.20 - 0.042)

With the underlying trading at $1.05;
- The call option expires worthless
- The put option is worth 0.05
- Your profit is 0.008 (0.05 - 0.042)

With the underlying trading at $1.50;
- The call option is worth 0.40
- The put option expires worthless
- Your profit is 0.358 (0.40 - 0.042)

With the underlying trading at $2.00;
- The call option is worth 0.90
- The put option expires worthless
- Your profit is 0.858 (0.90 - 0.042)

Let me know if anything is unlcear.

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