Biotech straddles

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enjoytrading

3m biotech straddles (XBI at-the-money) are so expensive that selling them at current pricing would have been profitable 93% of the time going back to 2006 on a hold to maturity basis. I haven't seen a historical Sharpe ratio this high on a sold index straddle in a while. What do you guys think of this? Part of me thinks it's really exciting, the other part is nervous of more of the news flow that has led to the current drop. Would currently collect $13.30 or about 22% of spot.

Found and back-tested this trade using a homegrown app, happy to share it with people if there's interest.

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Are you just taking a $13 credit and running that against the historical distribution?

That will look great, problem is you can't sell that when it's realizing 10vol and it says nothing of what happens going forward.
 
cvds16 said:
how do you get such a high number of trades ?
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I'm looking at every possible historical occurrence of three month rolling realized moves on XBI and comparing that to the credit I'd be receiving on the straddles. That's why the trade count is so high. This shows how a $13 straddle would have performed in the past. There were only moves in excess of $22% of spot in 3 months 7% of the time.
 
Soon2Bgreat said:
Are you just taking a $13 credit and running that against the historical distribution?

That will look great, problem is you can't sell that when it's realizing 10vol and it says nothing of what happens going forward.
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Agreed somewhat. My experience is that the market often misprices vol (vol premiums, fear, supply/demand, etc.) and that looking at historical distributions can often help contextualize what outcomes can be better than implieds. Both have their uses.

I ran a similar historical pricer to look at what the straddles have cost in the past (looking at replicating straddles instead of historical returns), and they are more expensive than during the financial crisis (blue line below). What technicals would you prefer to look at?

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Good call, areo you going to sell premium on these? one issue i have with this trade is that its dropped so much recently that it might be due for a rebound which could be volatile.
 
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