Tuesday, March 3, 2009

Straddles Update

Here is an update from today's straddles, and from one posted on February 20.

Note that almost all positions are profitable (not counting comissions), even though the maximum moves were not yet achieved. This is likely because the markets went down today and volatility increased, therefore, making the options more expensive. Nevertheless, it is a profit, and one that was to be expected if the markets were to come down. This is why we use straddles.

As a side note, the table below shows the increase in value of the IWM puts, from a range of in-the-money to way out-of-the -money.

IWM started trading at $38, so any strikes under 38 were out-the-money. Note that they increase in value around +100% today, while the in-the-money strikes over 38 increased considerably less.

This is why using strangles (as opposed to straddles) is potentially more advantageous, and it is why I use very out-of-the money strangles when there are many days to expiration, as is the case now. I currently hold IWM 32s and 35s. They are of course, much riskier.

IWM chart:

(please click on images to enlarge)

Now, the table below shows what is happenning with the straddles posted on February 23:

These positions are not profitable (at least yet), as time-decay is eating at the premiums. The maximum moves required, however, are fully valid. The maximum moves calculated by our online tool are independent of the time to expiry. But, there is the warning that losses are possible as well if IWM stops dropping. Once you reach a profit threshold, take the profits.

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