Claude; In 90% or more cases Straddles in options don't really add
up like they look on paper I'v spent to much time disecting them
to want to go back. (1) The bookies hit you with a spread 4 times,
if they are sharp bookies and the price is going down the calls
lose value faster than the puts gain. If the price reverses and goes up they reverse and the puts suddenly lose value faster than the
calls gain. This is their edge or hidden spread it's there every
time I'v checked, and I'm not wasting any more time on it.
(2) Option commisions are considerably higher for the amount a shares controaled than out right buys or sells. With a straddle you have
double commisions going and coming on both sides, and as above
you have the spread, in / out and on both the calls and puts, and
the hidden spread as they skew the premium to give themselves the
edge as soon as the stock price makes a move.
(3) If the stock don't move, you are getting eat up both ways
losing time value in both positions. All in all option straddels
do not make any sence if you want either a bullish or bearish
position, you can take it at half the cost, and if your right often
make twice the money, just going one way at a time.
(4) The exception to the above is Straddels can make some sence,
"IF" you have no idea which way she is going to move, and find that
the bookies don't have spreads over a 1/16..any time the bid/ask
is over a 1/16 on short term options your getting shafted up front,
and can count on getting shafted in the rear as well when you go
to close..none the less..if you know that earnings report is coming
out and feel it will be a surprise but don't kown which way, then
a straddel can make sence. BUT you are counting on volitility, to
give you a profit, volitility either way..as you have no idea which
way she may go. Even here there is a better way to play.
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Note this on AOL there are many times I see 1/8 spreads, even 1/4
on the bid/ask with the options, and at a time when there may only be
a 1/16 on the stock .
A substitute for a straddle is to buy calls closest to the price, and short the stock, if it moves up cover as fast as you can , then let
the call run for a bit, if it moves down hope that it does so enough
that you lose all the call money. In short if buying calls and shorting don't appear to be worth the risk, you can damm well bet
that straddles on options will be worse, and that's a fact.
To do any of this you need a discount broker, or one that gives you
a yearly rate.
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Last never short naked no matter what your broker tells you, never
use "buy stops" or "stop loss" if your long and afraid of the stock buy puts, even if you have to sell calls to pay for the puts.
NO matter what they tell you if the stock gaps in after hour trading
and you get bought in after the open , they will always cover their own rear..and you will be stuck with a loss you never dreamed of.
I know of people who have lost their entire account over night,
thinking "buy stops" would limit their risk.
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It's odd to me at how many people get raped in the market but never
talk about it. I think a lot of brokers count on that, they know
that in most cases people will suffer the loss and not make any
formal complaint..and they will dispute the fact that you did not
understand, after all didn't you sign the form stating you
understood the risk in market..no matter what the broker tells you,
if you don't have it on tape, don't think you can use it.
Just because they may tape a transaction, does not mean it's there
for your benifit..I learned the hard way, to tape every phone
transaction..if they know you have a tape they will then be a lot
better about resolving any missunderstandings.
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Staddles on options generlly suck, if you get lucky on one or two
you'l be a sitting duck down the road. Look at the cost of calls,
weigh that against shorting the stock, if it don't look reasonable
dismise the idea of a straddle. If a stradde does work the call/
short sell will have worked better. ( but you should cover the short
before cashing in the call ).
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Good luck
Jim
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