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trade stock, stock option
[Opening Jan $32.50 straddle on Cox Communications (COX)/Buying Jan 32.50 Calls (COXAZ) and buying Jan 32.50 Puts (COXMZ)/ Day Limit $2.85 net debit]
Dear Member,
I am placing an order to open a straddle on Cox Communications (COX) buying the Jan 32.50 calls (COXAZ) 1.60 x 1.75 and buying the Jan 32.50 puts (COXMZ) 1.05 x 1.20. My day limit order will be to buy both legs for a net debit of $2.85. The options are "cheap" in the sense that implied volatility is in the 1st percentile.
The breakevens at expiration are $29.51 and $35.49. Assuming no change in volatility, there is a 98% statistical probability of the stock touching one or the other of those breakevens between now and expiration. My maximum loss if I make no adjustments through the life of the play would be the $2.85 if the stock closed exactly at $32.50 at expiration.
I like straddles because they provide limited risk with a potentially unlimited reward if the stock moves dramatically in one direction or the other. In addition, both legs should increase in value if there is an increase in volatility. Of course, I root for an increase in volatility and/or a big directional move. Often, a good move in volatility can override time decay of the option premiums.
When playing straddles, I expect to have some modest losses, but when I have a winner it can be quite substantial.
Remember August equity options expire tomorrow. Some index options expire at the OPEN tomorrow so today is the last day to trade those August index options (like the NDX for example).
DISCLOSURE: At the time of publication, I have no position in the referenced options or the underlying stock.
Sincerely,
Bill Kraft
CutLoss, Inc.
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