Microstrategy Trade Follow Up

This was a trade I outlined about three weeks ago in my Options Pricing and Volatility class, and I have received several e-mails asking about it. In the presentation I talked about how to increase the odds of success in a straddle by getting in to the trade earlier than the day or two before expiration date. The reason straddles have a low probability of success is that investors wait until the last minute to buy the options. By doing this, expectations have risen so much this causes the options to be so far overpriced that the anticipated move has already been priced into the options.
Microstrategy (MSTR) was our case study. Three weeks ago we purchased a 105 call (@$6.60) and 105 put (@$5.80) when the stock was trading at $105. We went with an ATM straddle because if IV were to rise and the price stayed relatively quiet, these options would have the greatest sensitivity to rising IV. In addition we were delta neutral, which meant at first we would be immune to price movement...unless it really started to take off, which it has. Afterall, isn't that the expectation with this strategy? Pick a stock that moves on or prior to earnings? At least that is why I trade them.

You can see the price has popped quite a bit on positive expectations, and IV has risen about 10%. The value of the call options are $17.00 and the value of the puts are $0.30. Overall as of today, this trade has seen a 40% return. Nice work!

Anybody look at (AT) today ?
The real joke is I am eating crow
anyway, I sold my put for a small
loss the same day I took it.I felt my analysis was all wrong due to my
not knowing what a spin off was.
Boy If I didnt feel dumb before
I sure do now.Hey I'm laughing
about it anyway, and a 4 point drop
is not exactly a 10 point drop that
I predicted on the homework. steve


A classic example that it is never easy to pick an earnings reaction. Try not to go directional in the face of an announcement. It hardly ever works out. No matter what the company has done in the past...it means nothing today. Sorry about the loss.


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About me

  • I'm Option Addict
  • From Saratoga Springs, Utah, United States
  • I am a professional trader and an instructor for Investools. I've had relations with the markets for 9 years. Born in Concord, CA, but reside in Saratoga Springs, Utah. Father of THREE, Husband of one.
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