Why can't you just....

Reaver · #1 09-24-2007, 01:23 AM

This may be a silly question...but since I don't know anything about options really...

Why can't you just buy a put and a call and then let the loser expire and exercise the winner?

I know it wouldn't always be that simple due to fluctuation in price...but I was just curious, as I imagine the probability would be on your side that a trend will end up going in one direction or another enough to justify the losses you'd take in a balancing market....

Thanks.

Sparrow · #2 09-24-2007, 03:58 AM

If the winner is not very far from the strike price it would not be enough to offset your losses.

Of course it might work sometimes but i don't know enough about options as well.

*Soultrader* · #3 09-24-2007, 04:32 AM

What you are describing there sounds like a straddle in which you purchase a put and a call where both options have the same exercise price and expiration.

Since both put and call are purchased you are long a straddle. While if you sold both put and call options you are short the straddle.

A long straddle has limited risk and unlimited profit potential as long as the markets move in either direction. The markets must move sharply in order to realize large gains and is a strategy used when you think the markets will move but unsure of which way.

If the markets remain flat, you lose the premium paid for on both the put and call. This strategy involves the assumption that volatility will pick up or is high in order to profit from such moves.

Also keep in mind that your gain is the exercise price minus the premium you paid for.

Nick1984 · #4 09-24-2007, 06:19 AM

Are you sure thats a straddle? If you buy a put and call at same strike your essentially buying a futures contract arent you? Or is that when you buy one and sell the other? Options are annoying as hell lol.

*Soultrader* · #5 09-24-2007, 06:38 AM

Originally Posted by Nick1984

Are you sure thats a straddle? If you buy a put and call at same strike your essentially buying a futures contract arent you? Or is that when you buy one and sell the other? Options are annoying as hell lol.

Yes, what I am describing is a straddle. I think what you are referring to is a bull and bear spread strategy.

brownsfan019 · #6 09-24-2007, 08:14 AM

I think James is right in terms of this being a straddle. It's been a few years since I traded options.

This makes sense Reav playing around volatility - esp earnings. Basically you are saying I think this is going up big or down big, I don't know which one, so I'll own a call and put and as long as prices moves, one will be worth quite a bit and one will be worthless.

From there, the key is knowing when to liquidate the winner. If playing earnings and volatility, you need some good timing on the exits - sometimes you need to exit right after the announcement and other times you could hold for weeks.

The straddle is a fairly simple strategy and you'd do well to paper trade it first. One piece of advice with options - you now have market makers involved. And it's not as simple as just saying - go long. You have to find the right option at the right price with good Greeks, etc. etc. Long story short - you can buy a call and the price of the stock goes up and you still lose money. Talk about being slapped around. All of your analysis could be correct and you'd still lose money due to implied volatility, etc. It takes a lot of work to take on an options position in my opinion.

darthtrader · #7 09-24-2007, 09:41 AM

here is an example from Options as A Strategic Investment:

XYZ common, 50
XYZ july 50 call 3
XYZ july 50 put 2

"If one purchased both the jully call and july 50 put, he would be buying a straddle. This would cost 5 points, plus commisions. If the underlying stock is exactly at 50 at expiration, the buyer would lose all his investment since both the put and all would expire worthless."

Basically, to make any money with that straddle you add up the premium you paid and add and subtract it from the underlying. If the stock is between 45 and 55 at expiration you would have a net loss. The kicker is the more volatility the higher the premium is going to be.
To me options are so deceptive and complex that the only way to play them is to be on the other side of that trade so your collecting premium and not paying it out.

Reaver · #8 09-24-2007, 12:40 PM

Thanks for the info. That is why I don't mess with options....way too much going against you, even if you make a good trade.

Reaver · #9 09-25-2007, 03:26 AM

It's funny to me how I can look at market generated data and all the information available as far as profiles cti data from the LDB rotations, etc and it makes sense to me..but I start looking at options and my brain goes numb....

I think that's a sign.

TinGull · #10 09-25-2007, 11:54 AM

HAHA! Options aren't really that difficult to understand. I think a lot of people make it out to be more difficult than it really is. Sure, there are a lot of different strategies one can use to make money, but in the end its all based on the parent chart and if you can read one chart, IMO, you can read all others. If you're interested in trading options, then PM me...I've got lots of useful info you want it.