Dive in. Volatility Straddle

I like this one. Given that there are three main components to option pricing and theory (time, underlying, and volatility (Theta, Delta, and Vega for the smarter ones out there)), this trade focuses on volatility and hopes to capture a rise in said component. As such, I call this a "Volatility Straddle" (it should be noted there is no difference between this and a normal straddle, just sounds cooler).

As you can see in the attached image, Adobe appears to have a run-up in Implied Volatility (IV) going into earnings release dates. The red arrows show the increasing levels of IV. The next earnings release is scheduled for after market close June 16, 2008 (20 days from May 27—when markets open again). So far, looking at the chart, IV appears to be relatively low and has not experienced a run-up. If Adobe follows the pattern as it has in the past, we can anticipate a similar run-up in IV. The Volatility Straddle should profitably exploit this.

Target: ADBE
Expiration: June 20, 2008
Earnings: June 16, 2008
Stock
Price: $41.25

Strategy: Buy Jun 42.5 Straddle
Call Mark: $1.10
Put Mark: $2.25
Net Debit: $3.35
Max
Duration: 20 Days (anytime during
June 16, as earnings are released AMC)

Let's now attempt to analyze this trade. Anytime you buy an option, you will have negative theta (each passing day will hurt you). This position has a negative theta of 5.28 (with one contract we expect the position to lose $5.28 a day due to time decay). Vega is positive 9.02, meaning for each 1.0 percentage point (100 basis points) increase we gain $9.02. Vega is the greek that lends itself to this strategy. Because we anticipate an increase of IV (I'm hoping for at least a 10 point increase) we want to be positive Vega. The final greek, Delta (I don't understand Gamma, so I will ignore it until I have a decent understanding of it), is -11.90, so we lose $12 for each $1 increase in the stock price. This is the part that confuses me the most. The goal of a straddle is to be delta-neutral, this is not always possible, and while this position has what is considered a tiny delta, It is odd to me that if the stock goes up a $1, we lose $12 because I know that if the stock were to go up, say $10 a share, this straddle would increase significantly in value. (I have a hunch Gamma would help explain some of this...)

Moving on, here are the Greeks for a few more farther out expirations for comparison's sake:

What I find interesting here is that all of these trades look a lot more attractive based off the greeks. The Jan 2009 expiration has a smaller Theta and significantly higher Vega. Other than having to shell out more cash for that option ($880 vs $335 for the Jun exp.), I see no reason why that shouldn't be the expiration this trade uses. For observations sake I will place a paper trade for all four expirations in hopes of better understanding this.

Cheers.