32 lines
2.0 KiB
Plaintext
32 lines
2.0 KiB
Plaintext
Trading the Long Straddle
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Option trading is all about optimizing the statistical chances of success. A
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long-straddle trade makes the most sense if traders think they can make
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money on both implied volatility and gamma. Many traders make the
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mistake of buying a straddle just before earnings are announced because
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they anticipate a big move in the stock. Of course, stock-price action is only
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half the story. The option premium can be extraordinarily expensive just
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before earnings, because the stock move is priced into the options. This is
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buying after the rush and before the crush. Although some traders are
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successful specializing in trading earnings, this is a hard way to make
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money.
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Ideally, the best time to buy volatility is before the move is priced in—
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that is, before everyone else does. This is conceptually the same as buying a
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stock in anticipation of bullish news. Once news comes out, the stock
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rallies, and it is often too late to participate in profits. The goal is to get in at
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the beginning of the trend, not the end—the same goal as in trading
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volatility.
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As in analyzing a stock, fundamental and technical tools exist for
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analyzing volatility—namely, news and volatility charts. For fundamentals,
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buy the rumor, sell the news applies to the rush and crush of implied
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volatility. Previous chapters discussed fundamental events that affect
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volatility; be prepared to act fast when volatility-changing situations present
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themselves. With charts, the elementary concept of buy low, sell high is
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obvious, yet profound. Review Chapter 14 for guidance on reading
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volatility charts.
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With all trading, getting in is easy. It’s managing the position, deciding
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when to hedge and when to get out that is the tricky part. This is especially
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true with the long straddle. Straddles are intended to be actively managed.
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Instead of waiting for a big linear move to evolve over time, traders can
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take profits intermittently through gamma scalping. Furthermore, they hold
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the trade only as long as gamma scalping appears to be a promising
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opportunity. |