Is Owning Straddles Overnight Viable?

Mark,


I think the kite spread is a good idea, but a big gap, like the one I
highlighted, is still very damaging despite having the kite spread.

Of
course trading smaller size will help, but that will result in smaller
profit too.

I have another idea, not sure about its feasibility, but maybe you can
share some insights. How about buying a straddle at the end of the
session, then sell it back next day when market opens. Transaction fee
may be an issue here if I do this everyday, but let’s assume I only do
this when I think something big might happen, like earnings report.


Thanks.

John,

***


1) Smaller size:  The primary purpose of trading smaller size is to reduce risk.  And it’s the easiest, most convenient risk management tool.  too bad it’s used so infrequently.

In my opinion, ‘size’ is a crucial, risk-related decision that must be made for each trade.  Of course, we already ‘know’ our preferred size, so unless some change is being considered, this decision is already known at the time the trade is initiated.

2) A ‘big gap’ is usually very profitable when you are the owner of naked long options.  The only reason you may have a problem with it is that you are using one kite per 10 call spreads.  That’s not really enough to provide a gap profit. 

But is that your true goal?  A profit from an unexpected, unlikely event?  Wouldn’t it be more prudent to own a single kite as partial insurance?

These two figures show a 10-lot of call spreads protected by one, and then two kite spreads.

10_IC_+_one_kite

2_kites

Two kite spreads yields a profit on a 10% gap.  That is so unlikely that I cannot see how it’s worth the cost of buying two kites.


3) There are multiple problems with this play:

a) Daily commissions

b) Daily time decay:  Yes, holding a trade overnight results in time decay for the options.  See Adam Warner’s post for more on this.

c) Slippage.  You may not have to pay offers and sell bids, but every time you trade, you give up some value to the mid-point of the bid/ask spreads.

d) If you think you have any idea when ‘something big’ will happen, then all you have to do is quit trading, take advantage of your ability to predict such an occurrence, and position yourself for an occasional windfall.  That’s much easier than trading every day.

Earnings report?  Are you kidding me?  That’s when all the amateurs pay inflated prices for options.  That’s the time you don’t want to be buying options. See this post.

e) If you don’t do it every day, you will surely miss the terrorist attack, or the assassination, or the massive earthquake and tsunami that has a huge economic effect.  You will miss the out-of-the-blue discovery of a cancer cure.  In short, you know you cannot time the market, and more than that, the gap producing events are unexpected.  By definition you have no clue when one may occur.

654


, , ,

6 Responses to Is Owning Straddles Overnight Viable?

  1. Henry Tzuo 04/01/2010 at 9:37 AM #

    Hi Mark:
    I have bought the cool book — lesson of a lifetime — and thanks for sharing your valuable experience with us. I totally agree with you. I feel very lucky that I got some of the unpleasant experience very early in my trading life — and your experience let me know that I am not alone. It confirmed many of my suspects. It is really good to know that someone very experienced also went through the same thing.
    Thanks again.
    Henry Tzuo

  2. Mark Wolfinger 04/01/2010 at 9:51 AM #

    Henry,
    Thanks for sharing your thoughts.
    It is easy to make money using options, But, as I often repeat – the difficult part is keeping that money.
    I agree that learning lessons early is truly a blessing. Best wishes for a successful trading career.

  3. 5teve 04/01/2010 at 11:16 AM #

    Hi, Mark
    Reading thru your blog, I feel I got a lot to learn. I have noticed the graph you use above, is there any software you recommand for us?
    when I look at Greeks of the positions (I use optionsxpress), there are Delta, Pos.Delta, Pos.Gamma, Pos.Theta and Pos.Vega. What is the difference of Dealta and Pos.Delta? I may know the definition of each Greeks, but I have no idea what the numbers represent. For instance, -59 for Pos.Delta, -3.12 for Pos.Gamma, 14.66 for Pos.Theta and -7.49 for Pos.Vega.(I have an IC with some kite) What message do those numbers tell us? Thanks

  4. Mark Wolfinger 04/01/2010 at 2:30 PM #

    5Teve,
    If this is troubling you, then it’s a problem for others. It’s worth a longer discussion.
    More on this tomorrow.
    I have no great software, and use what my broker provides.

  5. 5teve 04/01/2010 at 3:35 PM #

    Hi,Mark
    Thanks for spending your time on this topic. I am looking forward to it.

  6. Mark Wolfinger 04/01/2010 at 3:40 PM #

    This topic is probably worth an entire book.
    Not just the Greeks – but the idea of putting ideas together to generate the bigger picture.
    Regards,