I was just checking that 8/11 Call 462 and Put 438, a money losing trade. How long do you hold these strangles without losing the shirt…doc
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So I’m showing 464 call 8/18 for .20 and put 432 for .68 right now.
I’ll track this and see how it runs…doc
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Yes, Doc, that one is a money losing trade currently. SPY has been range-bound. I still have a chance for a slight profit or less of a loss If I can get some movement but not yet today. I feel like this consolidation needs to resolve soon breaking up or down. I think the one you are tracking looks good. Surely, if it doesn’t happen for me this week, it will have to happen by next week.
Yes, I do tend to hold onto losing trades, but often they are the losing sides of strangles where I have already made my profit. I do this just in case some movement might limit my losses or ideally make me extra profit. If the current SPY strangle goes all week with no movement then I will lose both sides. That would be the risk of strangles. We cannot expect rewards without risk. In the last 10 days I’ve closed 7 total trades. 6 winners, 1 loser, 125% return (yes, more than doubled what I put in). I’ll take my losses…
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I am a covered call writer and have done pretty good with that. I have rules.
Also, I was looking at the Russell 2000 and for strangles (new for me) it seems volatility is good. Well the volatility chart for the R2000 looks really good for strangles as a newb…doc
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Thanks @dereksas and @physician for this discussion.
Strangles are unfamiliar to me, also.
So, I’m following with interest.
ralph
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So I’m tracking the 8/25 strike 200 call $1.08
strike 201 0.85 and strike 202 0.66
also the 8/25 put 188 is$1.19
strike 187 is 1.03 and 186 is 0.87
TA has this as a red bar (down) day for IWM also. Lets see what happens over the next few days…doc
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Yes, Doc, the volatility is inherently higher on the smaller caps, but I’ve found that you end up paying for this in the option prices. If the prices are too high, this requires greater movement just to break even. I tend to shy away from options that are too expensive. For instance the Options on QQQ are more expensive then on SPY, but that makes sense since Nasdaq tends to be more volatile than S&P. I like to find just the right balance. SPY is usually where I go. Individual tickers tend to be more expensive than indexes, but I’ll trade strangles on some tickers if I feel like there is a big move coming. I did this recently on TSLA because this one moves in big strides (up and down) and I feel like something is going to happen. I also did it on AAPL because I had a feeling their earnings were going to be disappointing, which is actually not hard because these days everyone everywhere always has huge AAPL expectations.
Things have been working out well for me recently, but I try to keep things in perspective. It is unreasonable to expect huge 100%+ gains in the long run.
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Thanks for your thoughts on this. I was wondering how you calculate the potential gain/loss on the price movement…doc
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Hey Doc, as you look at the options on this trade, let me show you how I look at it. I’ll start with the least expensive:
194.10…,…,…,…,…,…6 3.1%
IWM…C 202 0.66…4 2.1%
8/25…P 186 0.87…4 2.1%
,…,…,…,…,.,…,…1.53…6 3.1%
From this you see that you have IWM currently at 194.10. You have the Call and Put prices for the 8/25 expiration. At the bottom you see that your total cost is 1.53. This means that in order to break even you need to be able to sell the call or put for 1.53 after which whatever you can get for the other side will be gravy. On the right, you see that IWM would have to move 4 points up or down for you to hit your break even price. You can also see that you actually need 6 points (not 4) going by week earlier prices, because chances are you will not be able to close the same day or the next day so worst case you are looking at week old options which are worth less. So, if you close right away, it appears that you will need a 2.1% move, but if you hold a week then you will need a 3.1% move.
You would have to run this same analysis on each of the possible options and prices to see which one gives you the best chance for profit. Also, you need to do this for both the calls and the puts like I just did. Yes, on this one it appears that what you need on both sides is equal, but this is not always true. I have seen some potential trades where I need 5 points up to break even on the call, but 20+ points down to break even on the put.
I have found this analysis to be very valuable in trying to decide the best places to trade and on the best strike prices to use.
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Hey Doc,
After giving you my analysis a bit ago, I decided I want to go ahead and give your trade a try. I decided that I wanted to try to get in before the end of day because it appeared to me like the indexes and the largest market cap stocks were all trying to break up on an intraday basis. Nothing big happened but we might be looking at at a gap tomorrow. If that happens I didn’t want to feel sorry that I didn’t get in today.
I didn’t have enough time to do a full analysis, but I was able to see that going further out of the money with cheaper options gave me a slightly better break even point. So I went with 205 Call and 180 Put.
One thing I will say is that I have found that there is always better volume when you trade in multiples of 5, or even better on multiples of 10. You just have a lot more people playing in the even/round numbers. When it comes time to close your trade, you don’t want there to be scarce volume because the bid ask spread will be wider and you need to give nickels and dimes in order to get out. If you look at the options on Yahoo Finance you can see the volume for every strike.
If you are trading SPY or some huge ticker, volume is usually not as big an issue because there are so many players, but generally speaking the more volume the better.
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Hey Doc, here’s the numbers for my trade:
194.30…,…,…,…,…,…5.5 2.8%
IWM…C 205 0.27…3 1.5%
8/25…P 180 0.38…4 2.1%
,…,…,…,…,.,…,…1.53…8.5 4.4%
I stand to make more money more easily if it goes up, but I’ll be fine if it crashes too. If I had more time I would have done a more thorough analysis to maximize return, but I’m satisfied for now.
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After giving you my analysis a bit ago, I decided I want to go ahead and give your trade a try. I decided that I wanted to try to get in before the end of day because it appeared to me like the indexes and the largest market cap stocks were all trying to break up on an intraday basis. Nothing big happened but we might be looking at at a gap tomorrow. If that happens I didn’t want to feel sorry that I didn’t get in today.
Derek
I noticed that later in the day the indexes started to turn green as did the R2000. I know from selling covered calls that green is better for the return. How do you work that for strangles? This is interesting for me as a covered call writer. The up side is that there is less risk unless the purchase doesn’t go either direction and the premium dwindles down to zero if I understand this correctly…doc
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Doc,
On strangles it really depends on the prices you choose. Generally speaking, if you are paying a little more for your calls then your profitability is better going up, but if you pay a little more for your puts, then you will do better going down. This is because whichever one is the higher price is also closer to the break even number above (or below), and the number is even closer because the other one was less expensive so your total break even number is smaller. When I set up my straddles I use this to favor the direction I think is more likely. I will generally start looking at the call or put and mentally multiply the option price by 2 to give me an initial idea how far the stock needs to move for me to break even. But this is only completely true if the other half is exactly the same price. I always try to make the prices similar, but typically one will be a little bigger than the other. So then I look at the other side and now I have both prices so I can more accurately calculate the total price for break even purposes. Lastly I make fine adjustments to the strike prices so that I favor the bull or the bear.
You can also use this method to really favor one side if you feel strongly about the direction. So for instance, If I really thought that SPY was about to take off I might pick the 8/25 SPY Call 460 at 1.65 and Put 405 at 0.31. The total break even is 1.96 and my Call break even is just a 1 point SPY rally. A 6 point (1.3%) move would double your money. Problem here is that the break even on the Put side is 35.5 points (7.9%), but even if you do not hit this break even on the downside, the Put still functions well to limit your risk should this trade move against you. For me, this is a preferable alternative to just buying a Call if I am trying to trade long for a gain I think is coming.
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Last year I was following a service that operated on the premise that the market/stocks swung up and down within a trading range from average lows to highs and back. They were trading options based on this and the premise is the same as what you are suggesting for strangles. It makes sense now what they were doing…doc
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Nice trades here. Looks like its going to be green for the puts you bought…doc
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I was looking at options activity for IWM and the call buying saw an increase due to the big drop today…doc
Since it gapped down then traded intraday steadily upward, I would say that the general intraday activity on the ticker was mostly buying. I suppose that would translate into more calls than puts.
I’m really not sure. Russell has been in an uptrend since May until about July 18, then consolidated sideways with little movement until July 27 when it became pretty volatile. I feel like the volatility is not yet done which makes it attractive for strangles. I’ve always felt like volatility is usually a bad sign and indicative of a bear market. We shall see…
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I’m looking at this chart and wondering if strangles would generate some solid profits on the wide swings here…doc
Here is one possible QQQ Strangle that I pulled up real quick:
372.00…,…,…,…,…,…10.5 (2.8%)
QQQ…C 390 0.74…6 (1.6%)
8/25…P 350 1.09…7 (1.8%)
,…,…,…,…,.,…,…1.83…12.5 (3.4%)
For QQQ, a move of 1.x% is generally reasonable since Nasdaq is generally more volatile than S&P. If you are still holding after one week, you need a lot more movement, but it is still possible.