Options question

[porph]

I have a fairly rudimentary knowledge of options and no experience of trading them. I had an idea today, somebody please tell me if this a valid strategy in any way shape or form:

Basically, the idea is that the current price of instrument X is at an historic s/r level which prices either previously bounced off of or went through and set new highs/lows.

At that point, one purchases both calls and puts at the current price (again I can't really conceptualise how much this outlay would be - the main sticking point) in equal quantities.

These are dated yy/yy/yyyy.

My thoughts would be that if price stays close to the initial price then I lose the total amount of the options price. If price moves either way before date yy/yy/yyyy, a profitable position arises. (Obviously the initial purchase price must be discounted).

I already have my own speculative strategies but I'd like to expand and options appeal.

 

[arabianights]

Google straddles and strangles....

 

[arabianights]

(But as a general rule, don't trade options unless you both understand the greeks and have a view on them)

 

[porph]

Google straddles and strangles....

Thanks, I thought that there was a term for it.

 

[porph]

(But as a general rule, don't trade options unless you both understand the greeks and have a view on them)

I understand them fine.. have a view on them, not so sure. I'll have to get the books out.

 

[Theodocious]

Yup...you are talking about being long a straddle (if the strikes are the same) or a strangle if not. Strangle will be cheaper compared to a straddle. Note that you are long volatility as well. So, if vol keeps dropping as it has been you might lose simply based on that factor alone. As for knowing the greeks, it's one of those lifelong journeys. Why dont you paper trade it. I hear you can do that at OptionsMonster w/o funding an account.

Good luck!

 

[ukdaytrader]

check this if you want to know your greek

http://www.trade2win.com/boards/general-trading-chat/61280-options-pricing.html

 

[porph]

Yup...you are talking about being long a straddle (if the strikes are the same) or a strangle if not. Strangle will be cheaper compared to a straddle. Note that you are long volatility as well. So, if vol keeps dropping as it has been you might lose simply based on that factor alone. As for knowing the greeks, it's one of those lifelong journeys. Why dont you paper trade it. I hear you can do that at OptionsMonster w/o funding an account.

Good luck!

Thanks, I will definately be demoing it for a while before going live (presuming i can make it work).

 

[TheBramble]

On a more prosaic level porph, you’re intimating you have an edge in assessing instruments which do not hang around S&R levels but either actively bounce off them or through them.

As others have suggested, getting to grips with the Greeks is essential if you intend to extend this edge successfully into options plays. But if you already have an edge in differentiating those that will move and those that will not, why take a locked-in yet relatively smaller profit with strangles and straddles when you could get greedy with a vanilla directional?

Sure the leverage from an options position is attractive, but if you’re effectively hedging out your exposure, that leverage is largely nullified by the nature of the hedge itself.

Maybe I’m missing the deeper nuances.

 

[porph]

On a more prosaic level porph, you’re intimating you have an edge in assessing instruments which do not hang around S&R levels but either actively bounce off them or through them.

As others have suggested, getting to grips with the Greeks is essential if you intend to extend this edge successfully into options plays. But if you already have an edge in differentiating those that will move and those that will not, why take a locked-in yet relatively smaller profit with strangles and straddles when you could get greedy with a vanilla directional?

Sure the leverage from an options position is attractive, but if you’re effectively hedging out your exposure, that leverage is largely nullified by the nature of the hedge itself.

Maybe I’m missing the deeper nuances.

I think that is where my lack of pricing knowledge shows. Ill have to do some more studying to make sure I understand what I'm doing and what I'm trying to do.

 

[elitejets]

You can paper trade it at thinkorswim too
https://www.thinkorswim.com/tos/displayPage.tos?webpage=paperMoney