Jim,
You gave me a lot to digest on your last post. Let me try to run down the points you presented:
(1) You are right ... the price of the options is set by the market bookies ... but it is based on demand. With that said, you will keep some of the premium during the movements if the demand is still present. Incidentally ... you are correct in that Put premium tends to decrease on the stock's upside slower than call premium decreases on the downside. This is usually across the board in the markets.
(2) Remember, the Straddler is looking for volatility without a clue as to direction. One of the positions will expire worthless (this is not the way I am playing AOL, however I have no commissions to deal with). For those who do pay commissions, the commissions on a straddle is smaller than if each position was entered into seperately.
(3) If the stock don't move you lose! Certainly ... but what are the odds that AOL won't move short term?!?!?
(4) Your Straddle with the Short position instead of the Put will tie up much more capital than a true straddle, hence porrer return %. True, the time premium of the put is taken out of the equation your way.
Jim, I should point out that I am almost always a SELLER of straddles on neutral to slightly bullish stocks which have significant time value premiums. Case in point ... MSFT Oct 125's. Sold both sides netting $20 credit. What this means to mean is that I break-even at 105 and 145 at expiration. I just "Watch" the stock to determine when (realy if) I lick my wounds and take my losses during the period of time the straddle is out there, and I look for my exit based upon very few criterion. I am NOT that concerned about having naked calls out there when the stock is still more than 15 points from my expiry b/e point. And say the stock quickly runs to 140 and I exit. That time premium disappears rather quickly on the run up as the contract gets deeper in the money. I know it sounds risky, but remember what you said in your post concerning the difficulty of ever making money on a straddle, I've yet to exit for a loss on these, although I can't say I've done that many as I've grown into this strategy as a primary strategy within the last 3 months. Well that's why I sell 'em.
Now buying the near-term straddle on AOL was a little bit of a no-brainer for me as I know the stock is going to be plenty volatile in the short-term, and I was playing it very differently, as I want to make money on both sides! I chose the calls in the money on this one as I knew their action had been up. I could have been wrong, but if the action goes down ... I still have a lot of puts that would more than compensate the loss of the call-side of the straddle. Very odd way to play this I agree ... but we're dealing with the oddest stock I HAVE EVER SEEN!!!!!! Not much $$$ invested either, wouldn't care too much if I lost it all.
Hey, different people setup different positions. What I am trying to setup are the positions that ultimately MATCH THE STOCK'S PROFIT BELL CURVE!! What are the odds that MSFT closes above/below 105/145 in the next 3 months. PROFIT seems very probable don't it! I am extremely Neutral on MSFT now as they are at a very high P/E (deservedly so, but not higher), and they are doing unprofitable things NOW that will eventually pave the way to more profits through diversification later. This tells me the stock will sit or pull back slightly on a market correction (which we are VERY due for). |
