Gerry,
My strategy revolves around volatility in the particular stock that I am dealing with. There are some rules that I follow in selecting which stock I feel would be a good straddle candidate. The stock must be heavily traded, have a big public following(a "headline" stock such as IOMG, HWP, USRX), and most importantly, it must be volatile. I am currently planning my straddle position on IOMG, which I feel meets all of the above criteria. Currently, IOMG has a trading range between 26-29, and investors have a "buy on dip" mentality when it comes to this stock. It is the same with INTC. I will look to establish the call leg of the straddle on the next dip on IOMG, which may come this Friday. I feel a fair price for IOMG is between 25-27 and doubt that the shares will fall below this range before earnings, unless there is some really negative news on the company, which I haven't seen any real indication of yet. In establishing the put leg of the straddle, I will probably wait for IOMG to make its little pre-earnings run up so that I will not be paying more than what I have to. This example is not a straddle in the true sense of the word.
I am also looking at buying an on-the-money July straddle on IOMG
the day before earnings are announced. I am guessing that there will be at least an 8-10 point swing in either direction, which is not uncommon for this stock. Let's say hypothetically, that IOMG was trading at 30 the day before earnings. The call and put premiums would be at par, and would probably be trading close to the 1.5 mark each. Therefore, a straddle consisting of 5July30calls and 5July30puts would total roughly $1500. The breakeven points for this particular straddle would be 27 and 33. To profit, IOMG would have to go below 27 or above 33(a $3 move in either direction). I would simply let one leg expire, and hopefully close out the other with a nice profit at the end of the trading day. On any given day, the "normal" fluctuation in IOMG shares is about 2 to 2.5. This stock is by far the sweetest straddle candidate I have ever seen.
There are other stocks that I am looking to buying straddles on. They include ASND, USRX,and INTC among others. I will post when I think the time is right. I hope I answered your questions.
Regards,
FH |
