AI
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| Alias Born | 09/21/2009 |
Thursday, January 19, 2012 10:14:32 AM
You crossed the wrong fingers...opps.
BAC crushed it today. Spiked up to $7.20's.
However, here is the take home point you need to realize. Even though BAC did real well (up >5%), you are still below your breakeven on the original strangle.
hmmmm.....see my point. You got a great move out of the underlying and you would still be in the hole. The entire reason behind a straddle or strangle is to take advantage of a big move in either direction, usually based around earnings or announcements. The caveat that most people don't realize is that the market knows this and prices that movement into the options by increasing the IV. Once the news comes out, typically IV drops on these options and creates a deep Breakeven (BE) point. So you bought the option when it was expensive (high IV), sold it when it was cheap (low IV) and are banking that the underlying moves enough to not only offset the change in volatility of the option, but offset the other leg of the trade. In this case, it would also have to offset the loss of the PUT leg. Those are tough odds to overcome. Odds are that you have to overcome 80% of a 1 Standard deviation (SD) move priced into the original option. The standard deviation is usually widened at these times because of the reasons described above (high IV).
I would never to a straddle or strangle.
Addendum: Here is a link to a decent article on standard deviations in options trading...
www.optionetics.com/market/articles/2002/11/25/standard-deviation-in-options-trading
Standard deviation calculation...
Bell curve reflecting probabilities around standard deviations...
BAC crushed it today. Spiked up to $7.20's.
However, here is the take home point you need to realize. Even though BAC did real well (up >5%), you are still below your breakeven on the original strangle.
hmmmm.....see my point. You got a great move out of the underlying and you would still be in the hole. The entire reason behind a straddle or strangle is to take advantage of a big move in either direction, usually based around earnings or announcements. The caveat that most people don't realize is that the market knows this and prices that movement into the options by increasing the IV. Once the news comes out, typically IV drops on these options and creates a deep Breakeven (BE) point. So you bought the option when it was expensive (high IV), sold it when it was cheap (low IV) and are banking that the underlying moves enough to not only offset the change in volatility of the option, but offset the other leg of the trade. In this case, it would also have to offset the loss of the PUT leg. Those are tough odds to overcome. Odds are that you have to overcome 80% of a 1 Standard deviation (SD) move priced into the original option. The standard deviation is usually widened at these times because of the reasons described above (high IV).
I would never to a straddle or strangle.
Addendum: Here is a link to a decent article on standard deviations in options trading...
www.optionetics.com/market/articles/2002/11/25/standard-deviation-in-options-trading
Standard deviation calculation...
Bell curve reflecting probabilities around standard deviations...
Always trade with the trend, be quick to take losses, and slow to take profits.
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