buying options straddles

[stephenNUTS]

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except most of the time you wont cover the costs of buying the straddle. Options are a zero sum game, if it was this simple do you think the guys who make some big bucks would write options?

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FYP [img]/images/graemlins/cool.gif[/img]

[Mark1808]

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is there any downside to this?

it seems buying straddles on companies with beta > 3 is very profitable with there being the limited loss and unlimited gains

am i missing something?

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Imputed in the price of the options is an implied volitility. If volitility is greater than that which is implied in the price of the option you will gain, otherwise you will lose. Over the long run I would bet the market's estimate of volitility will be better than yours.

[Jestli]

so between time decay and impied volatility being added to the price it makes it difficult to make a lot of money? . . .

unless there happens to be a huge jump,

[Jimbo]

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so between time decay and impied volatility being added to the price it makes it difficult to make a lot of money? . . .

unless there happens to be a huge jump,

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Difficult yes, hardly possible, no. Personally I take a chance on estimating the next direction the stock will move and buy accordingly. If I am wrong tuff luck but the times I am correct I have eliminated both the time value decay and volatility premiums. I make much more profit the times I am correct than I lose the times I am wrong. My best results naturally come in the last week before expiration and in volatile times like this week, the conditions have been perfect.

Jimbo

[CrushinFelt]

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AKAM beta of 3.95 bought UMULG.OPA at 300 on the 12th sold for 360 on the 13th

NVDA beta of 3.45 bought UVAWG.OPA at 155 on the 9th and sold later that day at 185, rebought at 210 then sold on the 12th at 330. UVAWF.OPA at 55 on 12th sold 75 on 13th

RIMM beta of 1.74 bought PUT RULKD.opa at 610 8th sold at 440 on 9th. RULWD.OPA on 8th at 530 sold 9th at 845. RULKL.OPA on 12th at 435 sold 13th at 750.

i dont know if all that makes sense to anyone.

but it seems that you lose your initial investment as always with any option but with a straddle and a stock that is very volatile its bound to go significantly up or down and you get that benefit

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Implied probabilities of options are usually greater than historic volatilities of the underlying stock, so I would be surprised if a system based off of Beta would work. Also, you happen to have bought straddles it looks like at just the right time (right when stocks went haywire).

In short, I think your strategy was a matter of lucky timing and less about having found a good generic strategy.

[Jestli]

jimbo - do you do a straddle or just buy a call when you think its going up and a put when u think its goin down

crushinfelt - definately just got lucky with the timing, theres no such thing as a surefire generic strategy

[UrmaBlume]

The premium for any option includes a consideration of the expected volatility of the underlying issue.

As time wanes this premium decays and this is the main reason you can be right about an option trade and still lose money.

When you buy a straddle you pay a double premium so you must have double the expected volatility to succeed.

While it is almost a certainty that the underlying price will move during the life of the straddle, the question is will it move enough to pay the double premium and still leave a profit.

The Options Market Makers are not in business to make you money, the are in the business to take money from traders with such naive ideas.