Straddle Followup

Published on 18 Jan 2009 at 5:01 pm. No Comments.
Filed under Investing.

It’s been a while since I posted anything. Life has it’s ways of smacking you around sometimes. I did play with straddles a little as I talked about in my last post. I did one shortly after that post on GM on 11/12 when it was trading around 3.50. This was going into the hearings on bailing out the Auto industry and I didn’t know which way it would move, I just thought it would move big one way or another. That’s when you want to use a straddle. I bought 10 $3 calls and 10 $3 puts at a combined price of $1.29. One thing about a straddle, specially in this market, is that you can get out of either side whenever you want without changing your risk profile. Your max loss is always the cost of both options combined. As that week proceeded and we neared expiration date the value of my options was decaying and no big news had come out. I sold half the options at a small loss just to get some money back.  I got lucky and was able to unload the rest on the 20th when GM traded in a range of 1.7 to 4. This basically saved the trade and I came out about even after fees. They would have expired basically worthless the next day.

So if you think a stock is going to make a big move but you don’t know which direction, a straddle can help you profit on that movement.

Since then it’s been hit and miss trying to play financials and energy stocks, and a huge miss on a big AAPL options bet going into Macworld when a strategically timed and totally suspect — even tho the info may turn out to be true — blog posts about Steve Job’s health came out driving the stock way down. Luckily I did sell half my position as it ran up into Macworld or it would have been much worse.

So for now I am just sticking to stocks I believe in for the long term and then selling covered calls against them in the interim to take advantage of the volatility and make some money while I wait for a recovery. With the market the way it is, selling options is the safest bet IMO. There’s nothing like selling some calls after a stock has run up from where you bought it, then a few days later covering during the seemingly inevitable pullback.

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