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William,
There are Entry Strategies, and Exit Strategies... and these pretty much
help you determine when (timing) and where (pricing) to get in or out. The
volatility breakout technique is one of these.
Straddles, strangles, ratio-spreads, back-spreads, bull & bear spreads,
butterflies, condors, and other spreads are all combination positions of
options that allow you to take advantage of different expectations.
Depending on how you mix and match them, you can take advantage of some,
any, or most of the following; time decay, fast or slow price movement,
public's fear (shows up in excess premium), emotional exhaustion, market
surprises, trends, and consolidation channels, among a zillion other
possibilities.
Specifically, a long "Strangle" is when you buy an OTM put, and buy an OTM
call on the same underlying asset. This position decays rapidly through
time. The only way to make profits in a long strangle is for a VERY big
move in the market that happens VERY rapidly.
Generally, only 2 kinds of traders buy long strangles;
1) Market Makers, because they HAVE TO when presented by a seller in order
to keep their responsibilities to fill orders on the floor. (They
immediately hedge off the risks with offsetting positions.)
2) Rookie Public Traders, because it APPEARS to be a good "bargain." The
truth is, bang-for-the-buck, they're buying a suckers bet (they have no idea
how to hedge off risks), and building a house in quicksand.
Obviously, my feedback is NOT to go long an option strangle. Even after you
learn hedging strategies, the only economical way to execute all the trades
necessary to cover the risks is to be a floor trader because they pay
pennies in commissions compared to our dollars. (On the other hand, they
pay thousands in Exchange Membership fees every month, before any profits,
just for the privilege of showing up for work. So, maybe it IS better to be
"Off the floor!")
Hope this helps.
Good Luck in Profits,
Dave Donhoff
>Dave,
>
>I may sound ignorant but I am trying to learn...
>
>Your suggested S&R Volatility Break-out Entry system -- is that called a
>"Strangle" for options (except you have added the OCO to it)?
>Thank you in advance for your response.
>
>Sincerely,
>William W
>
-----Original Message-----
From: CalaxCorp@xxxxxxx <CalaxCorp@xxxxxxx>
To: deltaforce@xxxxxxxxxxxxx <deltaforce@xxxxxxxxxxxxx>
Date: Monday, August 24, 1998 10:04 AM
Subject: Re: Yen Option Strangles (Don't)
>In a message dated 8/22/98 10:10:28 PM Pacific Daylight Time,
>deltaforce@xxxxxxxxxxxxx writes:
>
>> Subj: Yen Option Strangles (Don't)
>> Date: 8/22/98 10:10:28 PM Pacific Daylight Time
>> From: deltaforce@xxxxxxxxxxxxx (David Donhoff)
>> Sender: owner-realtraders@xxxxxxxxxxxxxx
>> Reply-to: deltaforce@xxxxxxxxxxxxx
>> To: realtraders@xxxxxxxxxxxxxx (RealTraders Discussion Group)
>>
>> What you're looking at doing is called a "strangle," and in most cases
>> buying it is the WORST of both worlds. Here's why;
>>
>> Out-Of-The-Money options decay FASTER than any other strikes.
>>
>> If you really think the yen is going to bust out strongly, and you have
no
>> idea which way.... you'd be better buying a STRADDLE (Call and Put at the
>> SAME strike) or even a "Guts-Straddle" (with the both the Put AND the
Call
>In-
>> The-Money.)
>>
>> Better yet; Use a "Volatility Breakout" entry;
>> 1) Find your best estimation of Support and Resistance.
>> 2) Place a Market Buy on a Call, Contingent on the market AT or Above
your
>> resistance line.
>> 3) Place a Market Buy on a PUT, Contingent on the market AT or BELOW
your
>> Support line.
>> 4) Make both orders "OCO" (One Cancels the Other), so that after you
are
>in,
>> the other is cancelled.
>> 5) Immediately on fill, place your stops!
>>
>> Good Luck Trading!
>> Dave Donhoff
>
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