New Weapon to Arsenal

Calendar November 29, 2007 | Posted by Jorge

I don’t know about you, but this is becoming one wild ride. After dropping 200 points, rising 200 points, rising another 300 points, I can’t take much more of it! So I asked myself, “Self, what can I do in order to take advantage of these wild swings?” I came across a strategy that’s pretty risky but might just pay off in a market like this.

Options Strategy: The Straddle

The straddle consists of purchasing a call and a put at the same strike price in the same month. Here’s a graphical interpretation from Investopedia:

Here’s the issue with a straddle. If there’s very little movement in your target, you’ll lose out on both the call and the put. Lately, the market’s been either up triple digits or down triple digits. What I’ve been doing is playing a modified SPY straddle, that is, where the calls and puts are on different strikes but in the same month. I’ve been doing this primarily to lower the overall cost of the straddle. My profits will be much smaller, but I’ll have less capital tied up. So far it’s worked well with the put side bringing in a 30% profit on Monday and the call side bringing in a 25% profit on Wednesday. I’ve been extremely quick to lock in gains because, as you’ve noticed, the markets are still fairly volatile. The last thing I’d want is to lose out on a nice gain by wanting to squeeze out another few points of profit. I’ve learned from my mistakes trust me!

Looks like we’re somewhat flat this morning. How long the markets stay flat is anyone’s guess. I think we’ll see some profit taking, at least in the early morning after the huge run up the past couple of days. It’s only natural. Good luck!

Category Categories: Market Pulse, Options, Trading Strategies | Tag Tags: | Comments Comments

  • The straddle is good to use at the right time, but a strangle can be too. That's where you sell both sides. If it flattens you have a profit from both, but if it edges in either direction you only have a profit from one. If it takes off in either direction you face large losses.
    I think it's worth checking the implied volatility of any option before picking a direction. Too high vol can lead to a quick drop in premium and vice versa.
blog comments powered by Disqus