Options Trading (Straddles)?

Question

Hello

Experienced answers please.
Is there anything hidden I should look out for when setting up a straddle?
I'm not sure how implied volatility would affect the straddle i'm setting up

Answer 1

There is nothing "hidden" but if you do not understand how implied volatility would impact the straddle you may be in for a nasty surprise.

Here is a link to an example of what happened to someone who did not understand the roll of implied volatility.

http://messages.yahoo.com/Business_%26_Finance/Investments/threadview?bn=4686677&tid=3693&mid=3695

Let me give you a quote 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 wether 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.