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« The DOW, Gold and the HUI | Main | Silver Producers: Set to Outperform the PM Sector! »
Monday
Feb092009

Bank of America: Long Straddle Options Strategy

Back in November we published an article on an options strategy called The Long Straddle, Double and Quits. This was essentially a tactic designed to generate profits from volatility (something that is the order of the day in the current market climate) and we mentioned that we would be giving the theory a go to see if it worked in the reality of today’s markets. Well we have been giving it a go and this is how it has worked out so far:

Firstly if you have not read the previous article explaining the strategy, please read it now, as otherwise certain parts of the following article may not make total sense to you.

We decided that the banking sector was the best industry to apply this strategy at present, since it is both volatile and large enough to provide sufficient liquidity in the options contracts traded on financial stocks.

Within the industry we then chose Bank of America to be our vehicle, since this stock was experiencing very high volatility relative to size.

On the 21st January 2009 at 01:48:02 PM EST we purchased a set of February 2009 options on Bank of America. We bought $4.00 Puts at $0.47 and $7.50 Calls at $0.52.

The average strike price of the options was $5.75, which was where Bank of America shares were trading at the time. (We must ensure that the average of the strike prices of the puts and calls, equals the spot price of the stock, since if it was not then the trade would not be hedged equally, and have either a bullish or bearish bias) We placed an equal amount of capital into calls and puts.

Sell orders were then placed 120% higher than the purchase price of each contract.

On the 28th on January at 10:35:14 AM ET the sell order was triggered for the calls at $1.15.

We were in no hurry to sell the remaining put contracts, (since their value was close to zero and we had already made a profit on the move) but we sold them on the 30th January at 03:49:00 PM EST for $0.18.

Our total gross profit on the trade was 30%, which we achieved in 9 days.

Then on the 3rd February 2009, at 03:04:09 PM EST we purchased a set of February 2009 $5 options on Bank of America. We bought the calls for $1.04 and the puts for $0.77, and we bought in the ratio 1:1.4 to ensure that an equal amount of capital was invested in each side of the trade.

Again, sell orders were placed 120% higher than the purchase price of each contract.

In this case, due to the volatility experienced by Bank of America over the next few days, the net value of our entire position increased. (This is due to an increase in the “volatility premium” in options pricing methods). Therefore on the 6th February at 02:10:02 PM EST we sold both our calls and our puts at $1.83 and $0.61 respectively, before either reached 120% profit. This gave us a gross profit of 26.72%, which we achieved in 3 days.

So our first two long straddle moves have been very successful, generating a substantial return over a very short period of time. However, it should be noted that these trades are only designed to be open for a short time, since holding the contracts over a longer time frame exposes the trader to time decay, which will reduce the value of both positions.

We did not post these trades as we were doing them as trading signals on this website, since this is a gold website and this type of trade may be outside what many of our subscribers want from our newsletter.

However, if you are interested in these type of trades, and the possibility of receiving real time trading signals when we make moves like the two detailed above, please send an email to sam.kirtley@gmail.com to register your interest.

Volatile markets provide the best trading opportunities.


Stay tuned people..

If you are new to investment in the precious metals sector then you may wish to subscribe of our FREE newsletters regarding gold stocks, silver stocks and uranium stocks, just click on the links.

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Reader Comments (24)

i'm interested in your alerts

February 10, 2009 | Unregistered Commenterjtd

Dear Sam,

Having just read the article on long straddle options strategy in the Silver Prices News letter, I want to here register my interest in these type of trades and would like to receive real time trading signals when you get involved in such trading strategies.

Look forward to hearing from you soon.

February 10, 2009 | Unregistered CommenterFdS

I would be interested in receiving updates on your Option Trading strategy.

Thanks.

February 10, 2009 | Unregistered CommenterDM

I am writing to express interest in hearing about this type of trade.

February 10, 2009 | Unregistered CommenterD.H.

Sam, I am interested in your long straddle option plays.

thanks

February 10, 2009 | Unregistered CommenterRC

Hello,

I am a subscriber of the Gold and Silver newsletter and would also like to subscribe to the newsletter regarding other trades such as the one on Bank of America mentioned on the article below.

Thanks,

February 10, 2009 | Unregistered CommenterR.S.

Hello Sir:

I have been following your articles on both the purchase of puts and calls of financial stocks and would like to be included in your mail list.

Thanks very much.

Best regards,

February 10, 2009 | Unregistered CommenterjbB

These facinate me. Please keep me informed.
Thank you,
John

February 10, 2009 | Unregistered CommenterJohn

hi can you include me in you straddle alerts!

February 10, 2009 | Unregistered Commentermj

Thank-you so much for all of the strategies you have shared. I'm pretty much a beginner in trading..........but I've learned a great deal about options from your very clear explanations about your trades.

I would be interested in receiving e-mails detailing your moves as described in the e-mail today.

Thanks for all the information. Greatly appreciated!

Sincerely,

February 10, 2009 | Unregistered CommenterJ.N.

I'm interested in real time trading signals.

Tom

February 10, 2009 | Unregistered CommenterTom

Yes, I am interested in the real time trading signals.

February 10, 2009 | Unregistered CommenterDZ

Hi Sam,
I am responding to the article in the Gold Prices newsletter about the straddle option strategy. Please send further info. Thanks

February 11, 2009 | Unregistered CommenterTC

Hi I am interested in your long straddle trades information.

Thanks

February 11, 2009 | Unregistered CommenterTS

Hi.

I would be interested in receiving real time trading signals for your Long Straddle Options Strategy

February 11, 2009 | Unregistered CommenterGD

I would be interested in received real time trading signals. Thanks

February 11, 2009 | Unregistered CommenterB

Hi, I'm interested in the options strategy that I picked up on in Uranium-Stocks.net

February 11, 2009 | Unregistered CommenterS.G.

Hi,

I would have interest in taking these types of option straddles in my options portfolio when you see them as being attractive.

Thank you

February 11, 2009 | Unregistered CommenterRR

Interested!

Thanks!

February 11, 2009 | Unregistered CommenterM.P.

I am interested in Straddle options. Kindly keep me informed. Thx, Jb.

February 11, 2009 | Unregistered CommenterJb

Hi Sam,
I just read your long straddle strategy on Bank of America - congrats on your returns. Question: I know I am looking at this trade with benefit of hindsight and am aware of the risk mitigation aspect - but could you have put this trade on without the Put? result - more profit.
Previously, I commented on your stategy re:Hecla Mining but decided not to put that trade on, I'm monitoring the situation.
I am very interested in trading options but lack the experience and knowledge, I feel I need, to make a go of it. So, I was pleased to read that you are looking to publish/email alerts to interested readers.
Can I suggest a "new" newsletter dedicated to options/forex trading??
Anyway...I will continue my education and look forward to receiving your alerts.
Thanks and all the best,

MF

February 11, 2009 | Unregistered CommenterM.F.

I am interested in the types of straddle plays you placed with BAC.

Please subscribe my e-mail to these type of alerts.

Many thanks.

ST

February 11, 2009 | Unregistered CommenterST

Hi M.F,

Thanks for your email and interest in our new options trading service.

Whilst it is true that without the put the trade would have been vastly more profitable, removing the put from the equation changes the nature of the trade. With both a put and a call, the trade is a bet on volatility. However with just the call it changes to a bullish position. Since the only thing we could be certain on with BAC was wild swings in either direction, we had to ensure that the trade was geared to profiting from a swing either way, rather than just an upswing.

Thanks to you all for your comments, expressions of interest and suggestions. They are much appreciated.

Sam

February 11, 2009 | Unregistered CommenterGold Prices

I am a long time reader of your uranium, gold, and silver newsletters, and find them very valuable to my investing. I would appreciate receiving information on future put/call straddles. Thanks!

February 11, 2009 | Unregistered CommenterWilliam Gauger

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