Christmas Eve Pizza Delivery Options

I am spicing up my Boring Option Portfolio with a Short Straddle on Domino’s Pizza (DPZ). The pizza shares closed at $33.48 Tuesday, a gain of over 100% year to date, far outpacing rivals such as Papa Johns (PZZA). While the stock is obviously hot at the moment, there is as much room for the trend to continue as there is for a significant cool down.

Traditionally, a long straddle would be a preferred option strategy for capturing such moves; if the underlying share price continues to climb, the call sees gains; and if a correction occurs, the put is a winner. So why use a short straddle?

The answer; whipsaw. In order for a long straddle to turn a profit, not only must the share price rise or fall quite a bit, but it must remain at that level until expiration. A March 17 ’12  $33 long straddle would require $5 per share to open. The break even points on such a trade are at approximately $28 and $38, nearly a standard deviation from the current price. A scenario where the underlying dips to the recent $25 support would be a perfect match for a long straddle, but only if it occurs in March. The price could just as easily experience a pullback in February followed by a resumption of the trend that could wipe out any potential gains before the March expiration.




Rather than try to predict the timing of a pullback, a short straddle lets the market do the initial work. However, a short straddle is not a buy and hold type of option trade; it does require some maintenance. The short positions require hedging or rolling when the underlying begins to approach one of the break even points. This trade may prove to be less boring than the others in my portfolio, but for now I will maintain the position:

• Short 10 DPZ Mar. 17 ’12 $33 Call @ $2.55

• Short 10 DPZ Mar. 17 ’12 $33 Put @ $2.05