I was looking at my CMC option position just before lunch and decided to place a stop order to secure some profits as it was up to $6.30. I was going to set $6 for today.
By accident, and I have VERY seldom done this, I sold the option at a limit of $6 as I forgot to select the STOP box.
The only good side is that at least I got the $6.30 price so my profit was $1.20 per share. I had been considering selling the option as the stock has hit a recent resistance level at the $18 to $18.50 zone...it was as high as $18.65 and I suspect that it may have more room to move...another $1 I had aimed for anyway.
Seeing as I dumped my CAH put option side of the straddle this morning for a loss, this one covers that loss and change. The call for CAH was increasing at a much loser rate than the put was decreasing... the discrepancy was due to the spin off and symbol changes. I may look for another long straddle for next week, or at least after this run up has run it's course.
I had considered dumping both sides of the straddle and starting with a different call for CAH fully expecting the price of the stock to rise following the change, I decided to save the extra commission and just hold the call that I already had.
Having said that, I would have bought calls that were closer to the strike price, or even the first call that was out of the money. These calls are far cheaper which leads to another thought about ATM call trades.
Jeff.
Questrade, My direct access discount broker.
Showing posts with label Long Straddle. Show all posts
Showing posts with label Long Straddle. Show all posts
Wednesday, September 9, 2009
Wednesday, September 2, 2009
Long Straddle, Spinoffs and symbol changes
Well, I didn't expect anything major to be happening with CAH. It has been spun into KCF now. Seeing as I don't pay any attention to news or much about the stocks that I play with, whether options or stocks, I guess I can get blindsided the odd time.
My straddle was based on chart activity and it looked ready to head for a drop, as I said before I would have just played it short as a stock trade or just bought a put...but I wanted to play.
Yesterday they switched symbols on the NYSE while spinning off to KCF (Care Freedom I think). I would have received, had I shares in CAH, a 50% transfer, I would only get 1 share of KCF for every 2 shares of CAH. That would have sucked as they closed last night at around $35 and opened under $25 today.
That was the ride though, all I saw was the share price drop from $35 to $25... I waited for the options to be priced and was expecting my put to balloon by $10 per share and my call to lose $2 per share. I was surprised to see that the option chain symbols had changed. This means that I could not sell my options until they are transferred to the new symbols, which happened today.
Interestingly the options, as they only give me control of 100 shares, are not affected by the share exchange rate. Seeing as I was on both sides of the trade and the relationship between option price and stock price is not linear, I really was not concerned about this, once I realized what was going on.
There is an advantage to playing both sides simultaneously.
While the option pair was not the greatest I learned a few things and had some others reinforced, like that options can provide protection from unforeseen events. Just thought I would share.
The new options cost was changed though.
The call was at $2.85 it is now $2.4873 and the put was $2.50 and is now $2.8743
The old difference was 35 cents and the new difference is 38.7 cents
Another change was the delta, seeing as the strike price of the options is still $35 and the new stock price is $25, the price difference remained similar but the Delta is now 0.365 and 1.00 for the call and put respectively compared to the original 0.527 and 0.46. This makes the option pair skewed in my favour if the price of the stock continues to drop.
I have a feeling that the price is not going to do a whole lot for a while and I might lean toward it going up instead of down...which might not work in my favour unless it REALLY goes up a lot, like $10 or more. I will hold this to see what happens though.
My straddle was based on chart activity and it looked ready to head for a drop, as I said before I would have just played it short as a stock trade or just bought a put...but I wanted to play.
Yesterday they switched symbols on the NYSE while spinning off to KCF (Care Freedom I think). I would have received, had I shares in CAH, a 50% transfer, I would only get 1 share of KCF for every 2 shares of CAH. That would have sucked as they closed last night at around $35 and opened under $25 today.
That was the ride though, all I saw was the share price drop from $35 to $25... I waited for the options to be priced and was expecting my put to balloon by $10 per share and my call to lose $2 per share. I was surprised to see that the option chain symbols had changed. This means that I could not sell my options until they are transferred to the new symbols, which happened today.
Interestingly the options, as they only give me control of 100 shares, are not affected by the share exchange rate. Seeing as I was on both sides of the trade and the relationship between option price and stock price is not linear, I really was not concerned about this, once I realized what was going on.
There is an advantage to playing both sides simultaneously.
While the option pair was not the greatest I learned a few things and had some others reinforced, like that options can provide protection from unforeseen events. Just thought I would share.
The new options cost was changed though.
The call was at $2.85 it is now $2.4873 and the put was $2.50 and is now $2.8743
The old difference was 35 cents and the new difference is 38.7 cents
Another change was the delta, seeing as the strike price of the options is still $35 and the new stock price is $25, the price difference remained similar but the Delta is now 0.365 and 1.00 for the call and put respectively compared to the original 0.527 and 0.46. This makes the option pair skewed in my favour if the price of the stock continues to drop.
I have a feeling that the price is not going to do a whole lot for a while and I might lean toward it going up instead of down...which might not work in my favour unless it REALLY goes up a lot, like $10 or more. I will hold this to see what happens though.
Monday, August 31, 2009
CAH Long Straddle update
Well, I certainly could have picked a better option trade to test this... knowing a little more each day sometimes makes me shake my head at previous decisions...especially when they are still in play.
Review:
CAH Jan 35 put for $2.50, Delta = 0.389, OTM by 63 cents
CAH Jan 35 call for $2.85, Delta = 0.62, ITM by 63 cents
The EV on the puts (100%) was a bit higher so that should lead me to believe that traders consider a drop in price more likely. Even according to my charting I would have bought a put or just shorted the stock at $35.50 had I not been wanting to try this style of trade.
Currently:
CAH Jan 35 put for $2.95, Delta = 0.46, ITM by 74 cents
CAH Jan 35 call for $2.85, Delta = 0.524, OTM by 74 cents
So I am up 45 cents on the put and down 90 cents on the call for a net loss of 35 cents. If the Delta holds true then the rate of decline in the call is reducing and the rate of increase in the put is increasing...assuming that the price of the stock actually continues down.
I expect to hold the put and, if the price jumps today, I may close my call at a smaller loss than appears right now.
Jeff.
Review:
CAH Jan 35 put for $2.50, Delta = 0.389, OTM by 63 cents
CAH Jan 35 call for $2.85, Delta = 0.62, ITM by 63 cents
The EV on the puts (100%) was a bit higher so that should lead me to believe that traders consider a drop in price more likely. Even according to my charting I would have bought a put or just shorted the stock at $35.50 had I not been wanting to try this style of trade.
Currently:
CAH Jan 35 put for $2.95, Delta = 0.46, ITM by 74 cents
CAH Jan 35 call for $2.85, Delta = 0.524, OTM by 74 cents
So I am up 45 cents on the put and down 90 cents on the call for a net loss of 35 cents. If the Delta holds true then the rate of decline in the call is reducing and the rate of increase in the put is increasing...assuming that the price of the stock actually continues down.
I expect to hold the put and, if the price jumps today, I may close my call at a smaller loss than appears right now.
Jeff.
Friday, August 21, 2009
Long straddle and more options
There are two versions of the straddle, which I found while looking up the real definition of the long straddle. The Strap and the Strip. They are a bullish and bearish twist to the same strategy and I considered one for my CAH straddle trade.
The strap is just weighting the trade toward the bullish side by buying more calls than puts, any ratio will do depending upon how sure I might be of a certain move, this still limits the downside loss should the trade go south but increases the profits if the stock price heads up. Even at this it is still not as profitable as just being right and buying the call or put.
The strip is just the reverse.
Actually, I see there is also a short straddle. This one expects the price to NOT move as I would sell short the calls and puts. Unlike the long straddle the loss is not limited. Should the price move either direction and the option expires ITM then the option will get exercised at my expense. I could always just buy back the options to cut losses though. I have not really investigated this one much at all as I cannot write options right now and I am so stuck on looking for stocks that move that I would be at a loss to try to find stocks that will not move.
Jeff.
The strap is just weighting the trade toward the bullish side by buying more calls than puts, any ratio will do depending upon how sure I might be of a certain move, this still limits the downside loss should the trade go south but increases the profits if the stock price heads up. Even at this it is still not as profitable as just being right and buying the call or put.
The strip is just the reverse.
Actually, I see there is also a short straddle. This one expects the price to NOT move as I would sell short the calls and puts. Unlike the long straddle the loss is not limited. Should the price move either direction and the option expires ITM then the option will get exercised at my expense. I could always just buy back the options to cut losses though. I have not really investigated this one much at all as I cannot write options right now and I am so stuck on looking for stocks that move that I would be at a loss to try to find stocks that will not move.
Jeff.
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.
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.
Thursday, August 20, 2009
Options strategy #1, the Long Straddle
The long straddle, I didn't know this was what it was called though.
For some time I have kept the idea of holding a long and short position simultaneously in order to hedge and take the eventual move, perhaps using some sort of calculated stop. Holding long and short positions in the same account is not allowed...but I have three accounts so I could do it. I eventually figured that there would be no real advantage and I would probably get whipsawed out of both positions for losses anyway.
Then I considered using ETFs. Always long positions but using bull and bear ETFs. I even tried this in a fake account by purchasing $100,000 of ETFs using a balancing method to ensure that the opposing trades were even based on dollar values. What I expected to see was a zero sum game. What I ended up with was an eroded account as the nature of the ETFs lost money in the end.
All in all I was better off just trading long or short and leaving the hedge alone...
...until now.
While playing with the options numbers I came up with a two trade strategy that should produce consistent returns. Like any strategy it relies on certain factors to work out in my favour, it's just that these variables seem easier to determine in advance of the trade and direction of the eventual move is not important.
Noting that the farther In The Money an option gets the closer the correlation of the option price move gets to the stock price move. The converse is also true, the farther Out of The Money it gets the less the correlation holds. Up is still up and down is still down but the ratio shifts to lessen the option price move compared to the stock price move OTM.
So, the strategy is this:
Buy At The Money calls and At The Money puts at the same time for the same stock with a long term expiry. When the price goes up the call option price goes up faster than the put option price goes down. The reverse also holds true. Both options benefit from an increase in volatility as well, but I am not sure how much of a factor this may be.
Stocks to use:
Stocks that are poised to move, say something that has a huge run up that may either continue or pullback. Perhaps something just prior to earnings announcements or big news events which may produce a large swing. There are tons of indicators that could be used to find these, and I tuned a scan to find two or three stocks that fit based solely on charts so the selection is small... intentionally so. No sense in having too many to choose from.
Things to watch for:
Buying the options right will help but may end up leaving me stuck with one side of the trade, the losing side, so limit orders may not be the best idea here. Market orders get me in but then the spread is already a loss.
Finding a stock with a large enough ATR (Average True Range) to ensure that the limits will both get hit or that the small loss is not a large factor would be good.
The last, and perhaps most important thing is to be reasonably certain that the stock is going to move within the timeframe of the option expiry. A stock that tends to languish for long periods of time is not one to choose.
I would consider that a setup that is likely to go in a particular direction already may be a good candidate as at least it will move, then concentrate on the position most likely to prosper first filling in the reverse position afterwards. Buy the call as the price is low and the put as the price is high is the best as this will take advantage of reducing the cost of the spread.
Advantages:
As long as the stock moves one option will out perform the other. I would consider this strategy an add on to existing trading. Something to play with and, if it proves consistently profitable, something to leave in the stable of trade strategies. Perhaps a nice slow account grower to use sideline cash in due to the lower risk associated with it.
An example I pulled from the first chart on my scan results:
CA...I didn't even check the company name, it doesn't matter anyway.
Using the February 22.50 calls and puts (the price is at $22.63 so it is close to the strike, another possibly good factor to consider)
Call option bid = $2.10, buy 5 contracts for $1050
Put option bid = $2.00, buy 5 contracts for $1000
Total capital = $2050
Assuming that the price rose $2.50 tomorrow to eliminate any time factors:
Call = 3.60, value = $1800 gain of $750
Put = 1.05, value = $525 loss of $475
Total value = $2325 for a net gain of $275... a 13.4% return on investment.
Obviously the gain by itself was a better profit as long as it was a correct call.
Assume the price dropped by the same $2.50.
Call = 1.05, value = $525 loss of $525
Put = 3.40, value = $1700 gain of $700
Total value = $2225 for a net gain of $175... a 8.5% return on investment.
Volume is a factor here as the more contracts purchased the greater the actual dollar amount gained. The downside may be the spread loss as it could be 10 to 15 cents per call which could suck $50 - $75 off of each side of the trade with 5 contracts. Spread is a large factor.
This will be tested next week...perhaps I can place a long straddle tomorrow to take advantage of some weekend volatility...we'll see tomorrow.
Jeff.
For some time I have kept the idea of holding a long and short position simultaneously in order to hedge and take the eventual move, perhaps using some sort of calculated stop. Holding long and short positions in the same account is not allowed...but I have three accounts so I could do it. I eventually figured that there would be no real advantage and I would probably get whipsawed out of both positions for losses anyway.
Then I considered using ETFs. Always long positions but using bull and bear ETFs. I even tried this in a fake account by purchasing $100,000 of ETFs using a balancing method to ensure that the opposing trades were even based on dollar values. What I expected to see was a zero sum game. What I ended up with was an eroded account as the nature of the ETFs lost money in the end.
All in all I was better off just trading long or short and leaving the hedge alone...
...until now.
While playing with the options numbers I came up with a two trade strategy that should produce consistent returns. Like any strategy it relies on certain factors to work out in my favour, it's just that these variables seem easier to determine in advance of the trade and direction of the eventual move is not important.
Noting that the farther In The Money an option gets the closer the correlation of the option price move gets to the stock price move. The converse is also true, the farther Out of The Money it gets the less the correlation holds. Up is still up and down is still down but the ratio shifts to lessen the option price move compared to the stock price move OTM.
So, the strategy is this:
Buy At The Money calls and At The Money puts at the same time for the same stock with a long term expiry. When the price goes up the call option price goes up faster than the put option price goes down. The reverse also holds true. Both options benefit from an increase in volatility as well, but I am not sure how much of a factor this may be.
Stocks to use:
Stocks that are poised to move, say something that has a huge run up that may either continue or pullback. Perhaps something just prior to earnings announcements or big news events which may produce a large swing. There are tons of indicators that could be used to find these, and I tuned a scan to find two or three stocks that fit based solely on charts so the selection is small... intentionally so. No sense in having too many to choose from.
Things to watch for:
Buying the options right will help but may end up leaving me stuck with one side of the trade, the losing side, so limit orders may not be the best idea here. Market orders get me in but then the spread is already a loss.
Finding a stock with a large enough ATR (Average True Range) to ensure that the limits will both get hit or that the small loss is not a large factor would be good.
The last, and perhaps most important thing is to be reasonably certain that the stock is going to move within the timeframe of the option expiry. A stock that tends to languish for long periods of time is not one to choose.
I would consider that a setup that is likely to go in a particular direction already may be a good candidate as at least it will move, then concentrate on the position most likely to prosper first filling in the reverse position afterwards. Buy the call as the price is low and the put as the price is high is the best as this will take advantage of reducing the cost of the spread.
Advantages:
As long as the stock moves one option will out perform the other. I would consider this strategy an add on to existing trading. Something to play with and, if it proves consistently profitable, something to leave in the stable of trade strategies. Perhaps a nice slow account grower to use sideline cash in due to the lower risk associated with it.
An example I pulled from the first chart on my scan results:
CA...I didn't even check the company name, it doesn't matter anyway.
Using the February 22.50 calls and puts (the price is at $22.63 so it is close to the strike, another possibly good factor to consider)
Call option bid = $2.10, buy 5 contracts for $1050
Put option bid = $2.00, buy 5 contracts for $1000
Total capital = $2050
Assuming that the price rose $2.50 tomorrow to eliminate any time factors:
Call = 3.60, value = $1800 gain of $750
Put = 1.05, value = $525 loss of $475
Total value = $2325 for a net gain of $275... a 13.4% return on investment.
Obviously the gain by itself was a better profit as long as it was a correct call.
Assume the price dropped by the same $2.50.
Call = 1.05, value = $525 loss of $525
Put = 3.40, value = $1700 gain of $700
Total value = $2225 for a net gain of $175... a 8.5% return on investment.
Volume is a factor here as the more contracts purchased the greater the actual dollar amount gained. The downside may be the spread loss as it could be 10 to 15 cents per call which could suck $50 - $75 off of each side of the trade with 5 contracts. Spread is a large factor.
This will be tested next week...perhaps I can place a long straddle tomorrow to take advantage of some weekend volatility...we'll see tomorrow.
Jeff.
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