<<What is McMillan's impression>>
Well, Frank, if you insist on listening to the opinions of an accredited writer in the field instead of anonymous posters on internet threads (g), here is what I found. He doesn't specifically address whether a straddle is bullish or not in the chapter on the subject, but one can infer his position from what he says about the components of the straddle. The following are excerpts taken from the chapters of the same titles.
Re- Covered Call writing:
"The writer should be mildly bullish, or at least neutral, toward the underlying stock. By writing a call option against stock , one always decreases the risk of owning the stock. It may be possible to profit from a covered write if the stock declines somewhat."
Re- The sale of a put:
"As might be expected, the seller of a put will make money if the underlying stock increases in price...It is a bullishly oriented strategy."
Re- The sale of a Straddle:
"The covered sale of a straddle is very similar to the covered call writing strategy and would generally appeal to the same type of investor."
Ergo, I conclude it is a mildly bullish strategy. As Dan has pointed out, if one is very bearish about a stock's prospects, why risk riding it down in return for a small premium? Just sell the stock. Furthermore, he goes on to say:
"The similarity between this position and a covered call writer's position should be obvious. The covered straddle write is actually a covered write - long 100 shares of XYZ plus short one call - coupled with a naked put write. Since the naked put write has already been shown to be equivalent to a covered call write, this position is quite similar to a 200-share covered call write. (His italics) In fact, all the profit and loss characteristics of a covered call write are the same for the covered straddle write. There is limited upside profit potential and potentially large downside risk."
(This is beginning to sound less mysterious than I thought)
As Dan has suggested the potential rate of loss as the stock price falls is greater:
"The covered straddle writer loses money twice as fast on the downside, since his position is similar to a 200-share covered write."
Hmmm. I don't recall that aspect of the position being prominently discussed on the other thread. Figure 20-1 Shows the Profit or Loss at Expiration graph for a covered straddle write compared to covered call write and the downslope to the left is steeper for the straddle, meaning that losses mount faster as the price at expiration falls. I think this is what Roth was saying when he described the position as "more intense" than the stock.. Above your breakeven the profits are greater than for just a covered call but below the breakeven your losses are also greater. (Dang, there is always a catch)
Now that I understand it better, a covered straddle is simpler than I thought it was when it was first presented on the other thread. But it is also clear that the increased potential profitability is accompanied by risk of greater losses. It isn't a panacea.
dale@quotingandnotthinking.pov |
