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Unsing your numbers. If you buy 2 calls and sell 100 shares of stock and close
on your numbers, youmake $218.75 on the stock and lose $160 on the options for a
profit of $58.75. And the risk is not there. Just time erosion, negligable for
one day and volatility risk. The one thing in your favor is the fact that you
can win with movement in either direction with unlimited profit. Ira
Gitanshu Buch wrote:
> >Selling straddles and outside combinations is a recipe for disaster.
> >Limited profit and unlimited risk.
>
> Agree wholeheartedly.
>
> In the Tell Labs case today, shorting the common had the best return for
> equal risk.
>
> As a pure options play comparing short straddle with long puts, the return
> was favorable to the straddle. This was conceptually signaled on the TLAB
> chart.
>
> Short straddle risk, as Ira says, is theoretically unlimited for predefined
> maximum profit. There are exceptions, and there are time frames for trading.
> Maybe I should have been more specific.
>
> An update on how this played out today for Tell Labs, assuming one had no
> idea where implied volatility was and was just trading off of price action:
>
> Day trade:
>
> Sell to open at open: Sep 60 call for $412.50 credit per contract
> Sell to open at open: Sep 60 put for $400.00 credit per contract.
>
> Buy at close to close: Sep 60 call for $332.50 debit per contract
> Buy at close to close: Sep 60 put for $432.50 debit per contract.
>
> Gross profit = $47.50 per contract.
>
> If pre-open bias was bullish and the trader bought long $60 calls, the
> trader would have a loss of $80 per contract.
> If pre-open bias was bearish and the trader bought long $60 puts, the trader
> would have a gain of $32.50 per contract.
> -------------
>
> If the trader just went long stock at open, the trader would be down $218.75
> per 100 shares (1 contract). Here the long call trade was less of a loser.
>
> If the trader just went short stock at open, the trader would gain $218.75
> per 100 shares (1 contract). Here the long puts trade was less of a winner.
>
> -------------
>
> A straddle trader would presumably not trade blind "at the open/close".
> presumably that trader would sell the straddle on the breakdown of some
> technical level, and try to capture as much premium as possible.
>
> Assuming all traders went long/short at 10 AM seeing the same technical
> breakdown formation on their screens and placing trades,
>
> a. Short straddle gets a credit of $532.50 on puts and a credit of $400 on
> calls for a total credit of $932.50 This, if traded out MOC for the same
> debit of $765 gives the trader a gross profit of $167.50 per contract.
>
> b. Long puts gets a debit of $532.50 and is worth $432.50 at close, even as
> price at close was unchanged from TLAB price at entry ($58.0625 and a print
> low of 56.9325).
>
> This was my point on the chart, where I anticipated that a Short straddle
> would be more profitable than long puts or long calls, all other things
> being equal.
>
> Volatility collapsed, price went sideways for the rest of the day.
>
> In the FWIW dept,
>
> a/ short straddles do carry nasty risk, and are not recommended for traders
> without deep pockets, intra-day volatility data and a clear understanding of
> maximum adverse excursion.
>
> b/ Volatility contraction often occurs on the first couple of days after
> expiration. This also lent the straddle an inherent edge.
>
> c/ Margin and account capitalization requirements are completely different
> for each of the above specified trades.
>
> Basic intraday charts attached to show above example, implied data etc are
> not portable to my PC.
>
> Thanks, Ira, for highlighting the risk element.
>
> Regards,
> Gitanshu
>
> [Image]
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