Would this options straddle method work?

Question

Hello,
I wanted to ask whether you think this options straddle method would work:
When the market opens, buy equal numbers of calls and puts of the same stock. Set an equal stop loss amount for each. As the stock price changes, one option should stop out; watch the other and sell it when it becomes profitable.
Does this sound feasible, or is there a reason it would not work?

I imagine it would be best to pick a stock whose price moves fairly quickly. Is it best to use the same strike price for the call and put?

A related question: Do the prices of the call/put normally move proportionally (but in opposite directions) as the stock price goes up/down? I have noticed that sometimes they do and sometimes they don't (e.g. sometimes both the call and put decrease or increase on the same day).

Thanks,
Jeffrey

Answer 1

Jeffrey,

The straddle strategy you described would work sometimes and fail other times.

Some reasons it would sometimes fail:

(1) The stock might not move enough to stop out either position before time decay had already decreased the value of the positions significantly.

(2) Just because the stock moves in one direction far enough to stop out one position does not mean it will keep moving in that direction. You could stop out one position then have the stock reverse and take losses on both positions.

<<>>

The more a stock price moves the more expensive the options are likely to be. Ideally you would want to pick a stock whose price had not moved much recently but which you think will move quickly in the future.

<<>>

If you use different strike prices it would be a strangle instead of a straddle. I do not consider a straddle inherently superior or inferior to a strangle.

<<>>

The term "delta" is used to measure how much the value of an option changes due to the price of the stock going up $1.00. Delta for a call option is always positive and delta for a put option is always negative. The two move proportionally in that if you subtract the delta of the put from the delta of the call the result will always equal 1.0.

<<>>

That is because the value of an option depends on more than the price of the underlying stock. One big factor on the price of an option is implied volatility (IV), the amount of volatility expected in the stock price prior to expiration. A significant change in the IV can cause a greater change in the price of the options than the change due to delta. If IV goes up, the value of both the put and the call goes up. If IV goes down, the value of both the put and the call goes down.

Answer 2

Give it a try on paper. It would not work consistently. One scenario is that the stock moves just one direction, up or down. Say you bought a put and call for comcast and $2.50 each with a stop loss at $1. Comcast drops by $2. You make $1 profit on the put but the value of the call drops by more. Its possible you could make money on the call if you hold it long enough, or its possible that it expires worthless.
A second scenario is that the stock price just does not move enough in either direction. You are also paying twice the fees.

Puts and Calls move in correlation with each other, but not exactly proportional. Because they trade independlty. the values can differ. If news comes out that causes a lot of people to bet against a stock, many people will start buying puts, causing just the price of puts to go up. The value of calls may go down, but probably not as much as the puts rose.