Monday, February 9th, 2015

Buying straddles on the XLF?

All, I just got into the trading of options, but I can not find the address of financial stocks. Seems to vary according to the news every day. However, I can see that they are very volatile. Do you think that straddles to purchase the XLF is the best strategy to play this volatility options or do you believe will stabilize the financials?

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2 Responses to “Buying straddles on the XLF?”
  1. zman492 says:

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    No, but excluding expiration week straddles I would almost always shun straddles.

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    My guess, and it is purely a guess, is that there is at least one more jolt that is going to hit the financial sector this year.


    There are certainly factors that make a straddle look attractive. Specifically, implied volatility (IV) is at 76%, down from 96% a month ago, and less than the current 108% historical volatility.

    However, 76% still seems awfully high to me for an ETF.

    I’ll repeat a quote I have given before from Natenberg’s book “Option Volatility & Pricing” (page 187).

    “While there is no substitute for experience, most traders quickly learn an important rule: straddles and strangles are the riskiest of all spreads. This is true whether one buys or sells these strategies. New traders sometimes assume the purchase of straddles and strangles is not especially risky because such strategies have limited risk. But it can be just as painful to lose money day after day when one buys a straddle or strangle and the market fails to move, as it is to lose the same amount of money all at once when one sells a straddle and the market makes a violent move. Of course, a trader who is right about volatility can reap large rewards from straddles and strangles. But an experienced trader know that such strategies offer the least margin for error, and he will usually prefer other strategies with more desirable risk characteristics.”

    In that quote the phrase “straddles and strangles are the riskiest of all spreads” is emphasized.

  2. JWilly says:

    I would join the Yahoo Group Collars and Beyond and ask this question there.

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