CAH and the Long Straddle

Well, I couldn't help myself...I had to get one of these in play.

Now CAH may not have been my first choice had I enough time to really do some research but it fits the criteria close enough that I shouldn't lose my shirt on the endeavour.

Here is the chart for CAH, I tacked on the indicators that may be of value in checking these out.

RSI, on top. Any value over 70 is sort of an over bought indicator...just by it's nature as relative strength for this stock has not been above 70 in six months...let alone spent any time above 70.

ATR, bottom is the Average True range over the last five days. It is over 1. This only indicates that the stock's price may move, on average, over $1 per day in the last five days. Unlike the RSI indicator this one does spend some appreciable amount of time over $1 leading me consider that a few $1 plus days COULD be in any direction.

According to my P&F charting this stock would be shortable (buy puts) at anything over $35... so I use $35.50 as the trigger. I figured, rather than just buying a put I would try the straddle and see how it works out...see if my theory matches reality.

I bought the Jan 35 call and Jan 35 put at the same time. Unfortunately both are sitting 10 cents down as I did not get great prices with my limit orders. Ideally, once I decided on a straddle I should set limit orders in the AM and adjust them over the course of the day to get a lower put and option price as the stock price does it's normal gyrations. The 20 cent spread may become negligible over the long run anyway.

Total capital invested $535. I would have preferred to also have the stock price closer to the strike price of both options, CAH was 60 cents ITM for the call which makes it 60 cents OTM for the put. I will place a stop order at half of the value now for each option. This will get me out of the trade for a $250 or so loss, worst case should the price do nothing but hover, which I doubt, or it gets me out of the losing option while the winner runs increasing my profits on that side of the trade.

While I took the time to write this my call is now even (10 cent gain from open) and the put is still at -10 cents. The stock price has only gone up 9 cents or so. This shows the appreciation of the call as the price may be expected to rise, implied volatility at work here increasing the value of the extrinsic portion of the option...one more factor in creating the price movement non-linearity.

Lets see where this takes me.

Jeff.