Home › Forums › Swing Trades › Volatility Buy In BIDU
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September 9, 2013 at 8:11 pm #2609Steven PlaceKeymaster
After a super strong rally after earnings, the stock has done nothing for the past month.
Many times, option traders make volatility analysis super complicated. Let’s just do some simple math. The currenat ATR (average true range) is right under 4 bucks.
The September straddle is currently going for about 6.25.
That means if we see a 2*ATR move, then you make money.
The trade I like here is the September straddle. The idea here is that by September expiration we see either a retest of 52 week highs or we break clear support and the stock runs lower as stops are taken out.
Now the execution here is where it gets tricky. This is a straddle buy that has 2 weeks to expiration. That means there is a ton of theta risk.
I like scaling into positions like this. So if you can buy 1/2 of a position around 6.15 and then maybe add just under 6, that would be a good basis. If the value of the straddle goes under 3 bucks, get out of the trade.
Gamma scalping helps here– if you have the margin and can trade stock around this position that would be ideal.
September 10, 2013 at 9:46 pm #2610Steven PlaceKeymasterAfter a single day, the straddle here really perked up and is at a profit.
The question now is, what do you do with it here?
So the trade is sitting right around a 25% return on max risk, which isn’t half bad for a short term trade.
Now if you let this trade sit, you’ll need to see further upside (very possible here). But if BIDU reverts then you lose your gains *and* expose yourself to theta risk.
There are two potential adjustments to consider.
The first is a gamma scalp. This is where you trade stock around a position. The current delta per straddle is 50, so shorting -50 shares would synthetically lock in your profits and get your delta back to flat:
The problem with this trade is that it takes up a ton of margin to short stock.
Another opportunity that would accomplish the same thing would be to roll the straddle to new strikes. This frees up cash, but increases your current theta risk.
So consider closing out the 135 straddle and opening the 140 straddle:
That way if BIDU reverts or continues to breakout, you can continue to make money.
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