What is the best option strategy to play this hypothesis?

[CanOz]

The other option thread inspired me to get some help on a strategy i had thought of to trade options.

My hypothesis goes something like this:

My analysis tells me that GC 12-15 could be above 1100, or below 1100, but i'm almost positive that it won't be at 1100, anytime within the next 3 months.

My limited knowledge of options leads me to think this may involve some kind of a straddle, but how do i pick the best options to trade?

Let me say i am deeply appreciative of all help here. I've been meaning to learn options but I've always had heaps of questions....So thanks in advance to all the option gurus here.

Cheers,


CanOz

 

[sinner]

Long straddle $1100 or strangle $1095-1105 (or similar) would be appropriate if you are sure it won't be at 1100 at expiry, but long options and especially long straddle/strangle is very close to being a position on long volatility, in which case your return will be very small unless IV increases dramatically (and may be a hefty loss if IV crashes).

Optimally you'd be long the straddle with a supporting forecast of increasing IV and scalping gamma along the way.

Nothing really simple when it comes to options, those portraying it like that I think are doing disservice.

 

[CanOz]

Long straddle $1100 or strangle $1095-1105 (or similar) would be appropriate if you are sure it won't be at 1100 at expiry, but long options and especially long straddle/strangle is very close to being a position on long volatility, in which case your return will be very small unless IV increases dramatically (and may be a hefty loss if IV crashes).

Optimally you'd be long the straddle with a supporting forecast of increasing IV and scalping gamma along the way.

Nothing really simple when it comes to options, those portraying it like that I think are doing disservice.

Ok, thanks Sinner. One step at a time, so i can get this. I need to go long 1100 call and long the 1100 put. There are no Dec options at that strike, so i'll need to go out to march, which is fine.

 

[sinner]

Ok, thanks Sinner. One step at a time, so i can get this. I need to go long 1100 call and long the 1100 put. There are no Dec options at that strike, so i'll need to go out to march, which is fine.

Yep. So just as an example using GLD options with Dec expiry, using the ask prices from last Friday NY close:

$110 call is asking at $3.15
$110 put is asking at $4

so if you urgently wanted to get into a long straddle on $110 GLD (~equiv to $1100 spot gold) you'd pay $7.15 per straddle in premiums.

That means that by expiry, the price would have to have moved to greater than $117.15 or less than $102.85 ...any move less than that is a loss (your options end up worthless).

This is a gross simplification for the purposes of demonstration. Systematic simplistic options trading like this is not what most people would do to make a profit.

 

[hhse]

Hard to trade low implied IV rank with an 'ideal strategy' if you don't have an opinion on direction. Sometimes its better to move onto a different underlying where opportunity presents itself.

Buying a straddle would be "theoretically" correct, but in practice it would be a losing trade over the long term - unless you believe that you have some other edge that will take you outside the break even points.

 

[sinner]

Oh right, I also forgot to mention. You basically only get paid per dollar of movement outside the breakeven points. So let's say the price only makes it to $120 - you risked $7.15 for a $2.85 return.

For a 1 R:R return you'd need a $124.3 or $95.7 price target, and so on.

 

[wayneL]

If you use straddle or strangle, it is best to view closing before expirey as you don't want maximum the time decay of the final weeks of the option, therefore take available profit early if it has reached your target, or go out in expiry.

But bear in mind you will lose gamma (the acceleration rate of your potential profits ) on longer expiries.

Another option is a backspread if your bias is for a strong move in a direction, but hedged the other way. (A credit vertical spread with extra options on the long leg).

For instance if you think a move up is more likely than a move down, or that a move up is likely a greater magnitude than a move down, a call backspread might do the trick. Play with strikes for the desired scenario.

Like the straddle/strangle it is long vega (effect of volatility), but only on the upside and short vega on the downside, a plus for gold.