Tuesday, February 17, 2009

UCO Straddles for This Week and March

With earnings season over, we now move back to regular straddles. Prices for new straddles These will be updated a http://straddles.nexalogic.com

We have been playing UCO straddles since UCO was over $12, and rolling them over or buying new ones to match the successive new lower prices.

Last' Friday's unthinkable 7.50 straddle is now well in the money and should be sold. To move these lower to 6-7.50 for February is risky and again "unthinkable". However, the unthinkable has happened several times in the last couple of weeks.

Please see move required below, captured with our new StraddlesCalc2 tool.

Just a couple of days ago we were doing this:

The 9 puts are now worth $2.90, while the 9 calls are still worth $0.40, total $3.30, versus cost of $2.75. Note that the move in price of the underlying was 31.5%.

UPDATE 4PM: The 9 puts are now worth $3.10 and the 9 calls $0.35, for a total of $3.45. ROI is +25.4%.

We also posted the 9-10 strangle, which was purchased at a cost of $1.30. Today, had we held this, if would be worth $2.75, for +111.5%. In fact, any of the straddle and straddles so far would be quite profitable had they been held. Instead of holding, it is advisable to take frequent profits and use only profits when you buy new straddles. This market cannot to be trusted.

Always, always do your own due diligence please.

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Michael said...


What do you recommend as a primer for a newbie to this stuff, particularly relating to how you display the info.


The Shocked Investor said...

Hello Michael,

For someone who is new to options I would definitely recommend paper trading first for at least several transactions. This would be done using live prices from your broker, and always using the worst bid-ask prices. This means, if you are buying an option, use the ask price. When you sell it, use the bid price.

Once you have done this several times and are comfortable, then you should start with some very liquid options sch as IWM, and do only $100 to $200 transactions, i.e, 1 or 2 contracts. Commissions will be relatively large, but with options you will see that this does not matter much.

90-95% of options expire worthless every month, therefore they are extremely dangerous. The 90% of the people who make money are the ones who write the options, but for that you need large balances. Also, writing options can have unlimited loss potential, depending on what you do.

As for the charts, they are obtained from the online StraddleCalc2 tool at http://nexalogic.com/nexastraddles.html

Hope this helps.

Michael said...

Hi again,

I have a reasonable amount of experience with options but am having difficulty following your strategy. For example, in the first display from StraddlesCalc2 tool, i.e. uco @6.67, I gather the expiry is Feb? And the second table is March?

Straddle cost - appears to be the total premium which is the total cost since they are out of the money on both sides.

Dollar cost - total number of puts and calls x straddle cost.

Max moves - is that the amount of move necessary to be "in the money" on the trade?

And finally, I'm not quite sure how to use the calculator. For example, how do you come up with the number of options and strike for the straddles? Could you kindly give me an example of how you use it to screen opportunities?

Much obliged.

The Shocked Investor said...

Yes, the first table was for Feb, the second for March. The straddle cost was $0.40, which was the cost for the put the call ($0.20 each). This just means that if you had bought an equal number of $ in calls and puts, then the stock price would need $0.40 above the call strike ($7.50+$0.40=$7.90) or below the put price to break even ($6-$0.40 = $5.60).

In the above case, the put and the call premiums are the same. Had the price of the call been $0.15, and the puts $0.20, and you wanted to invest $1,000 in calls and $1,000 in puts, then you'd need to buy 66 call contracts and 50 put contracts. The tool tells you this.

The dollar cost is the total you paid for all the call and put contracts.

To use the tool, you specify the required field (marked with the red *). I.e., enter current stock price, desired call and put strikes, and current call and put premiums. The tool will figure out how many contracts you need to buy to recoup all your original investment, assuming a worst case scenario. I reality, if there are still many days to expiration (not the case today!) the move required will be lower as there will be residual value on the wrong side of the trade. That specific straddle discussed above was profitable yesterday for example as just the puts traded at $0.40, plus the calls still traded at $0.10. Thus the value was $0.50, vs the cost of $0.40.

Hope this helps.

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