Tuesday, March 18, 2008

Quick Fed Straddle Strudel

I mentioned in my January 30th blog about the volatility following Fed interest rate decisions and how putting on a straddle before the rate decision can pay big bucks. This needs to be quick so here are my straddle picks:

On the SPY (S&P tracking stock):
More conservative but more expensive play:
Buy Apr 132 Call SFBDB @ 3.80
Buy Apr 132 Put SFBPB @ 4.25
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Net debit = 8.05/contract

More risky but cheaper play (options expire this Friday):
Buy Mar 132 Call SFBCB @ 1.36
Buy Mar 132 Put SFBOB @ 2.02
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Net debit = 3.38/contract

On the QQQQ (NASDAQ 100 tracking stock):
More conservative but more expensive play:
Buy Apr 43 Call QQQDQ @ 1.30
Buy Apr 43 Put QQQPQ @ 1.58
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Net debit = 2.88/contract

More risky but cheaper play (options expire this Friday):
Buy Mar 43 Call QQQCQ @ 0.41
Buy Mar 43 Put QQQOQ @ 0.76
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Net debit = 1.17/contract

If the Fed doesn't lower by one basis point as expected, I think the market is really going to tank. Even if it does, it still might tank.

Place your orders and let's see how this plays out. I think we're in for a wild ride.

UPDATE at 12:45pm PDT
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About 20 minutes before the Fed decision, I placed a limit order for the April 43 straddle on the Qs at 2.90 which was at the asking price. I had to cancel it at 11:13am, two minutes before the decision, because it hadn't been executed! Good thing, too, because I wouldn't have been able to sell the puts at the 11:35am market low, even though today's put option volume is over 2600 contracts. However, had I played the March straddle, I most likely could have bought the spread and dumped the puts at the market low. I know this because my charting program shows me when these trades are executed. So, why did the March straddle work? Well, probably because today's option volume on the March puts is over 68,000 contracts, more than 25 times the April volume.

I guess the lesson here is that you need a tremendous amount of liquidity to be able to execute your trades in a timely manner. Generally, I trade options with a longer time horizon--on the order of hours, days, or weeks instead of in minutes and seconds.

Had I been able to perfectly trade the March straddle, I would have bought the put at 0.75 and sold it at 1.00, and the call at 0.45 and sold near the close for 0.65. The net profit would be 0.45/contract for a 37.5% gain (0.45/1.20 x 100).

Unfortunately, woulda-shoulda-coulda's don't count, but there's always a next time...and next time I'm trading the front-month contracts!

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