JUST IN CASE YOU'RE WONDERING -- A SPY LONG STRADDLE PRE-BREXIT?
A long straddle is a neutrally biased setup that is intended to take advantage of a large move in an underlying either to the put or call side and consists of an ATM long call and an ATM long put.
Given the fact that the market will either move up or down (potentially violently) in response to the outcome of the Brexit vote, you'd think that this would be an "ideal" setup for this type of binary event ... . But is it?
Let's look at the metrics of an example setup: a July 8th SPY 206 Long Straddle:
Probability of Profit: 46%
Max Profit: Undefined
Max Loss/Buying Power Effect: $694
Breakevens: 199.06/212.94
In short, you lose money on the setup if price stays between 199.06 and 212.94 and max loss occurs if price stays within the break evens at expiration. Conversely, you only make money on the setup if price goes above 213 (basically) or below 199. Not looking so hot now, is it?
In comparison, a 1 standard deviation long strangle, although cheaper to put on, has an even lower probability of profit and worse break even metrics. For example, a July 8th 197/216 SPY long strangle has a probability of profit of a mere 26% and break evens of 196 and 217 ... . In short, I would pass on the long strangle/long straddle plays here; in fact, you should probably pass on them virtually all the time ... . They're low probability plays and require fairly epic movement either way to make money (statistically, they're the least successful options strategy out there ... ).
Given the fact that the market will either move up or down (potentially violently) in response to the outcome of the Brexit vote, you'd think that this would be an "ideal" setup for this type of binary event ... . But is it?
Let's look at the metrics of an example setup: a July 8th SPY 206 Long Straddle:
Probability of Profit: 46%
Max Profit: Undefined
Max Loss/Buying Power Effect: $694
Breakevens: 199.06/212.94
In short, you lose money on the setup if price stays between 199.06 and 212.94 and max loss occurs if price stays within the break evens at expiration. Conversely, you only make money on the setup if price goes above 213 (basically) or below 199. Not looking so hot now, is it?
In comparison, a 1 standard deviation long strangle, although cheaper to put on, has an even lower probability of profit and worse break even metrics. For example, a July 8th 197/216 SPY long strangle has a probability of profit of a mere 26% and break evens of 196 and 217 ... . In short, I would pass on the long strangle/long straddle plays here; in fact, you should probably pass on them virtually all the time ... . They're low probability plays and require fairly epic movement either way to make money (statistically, they're the least successful options strategy out there ... ).