Edge for Straddles

misterkel

misterkel

Noticed - on straddles, the first few above the money straddle(s) are the same price (or lower) than the ATM straddles - due to the volatility smile, of course. What this means is that when the ticker price moves down, your ATM straddle might not make money, but when it moves up, you probably will.
I think there's a tradeable edge here, but not sure how to play it. Any thoughts?
 
So if you buy the straddle slightly above ATM (and so be slightly delta short) and the price of the underlying rises, all else being equal you will lose on the delta but gain on the vega (as the vol rolls up). Reverse if you buy the straddle slightly below ATM. Don't think there is a locked in edge here. If there is an edge it's in risk reversals where you buy the OTM call and sell the OTM put and hedge the delta with a short in the underlying (in an equity style market with higher downside than upside vol). But it's not much and is extremely well observed.
 
Quiet1 said:
So if you buy the straddle slightly above ATM (and so be slightly delta short) and the price of the underlying rises, all else being equal you will lose on the delta but gain on the vega (as the vol rolls up). Reverse if you buy the straddle slightly below ATM. Don't think there is a locked in edge here. If there is an edge it's in risk reversals where you buy the OTM call and sell the OTM put and hedge the delta with a short in the underlying (in an equity style market with higher downside than upside vol). But it's not much and is extremely well observed.
More...

Interesting approach. What I noticed in AMZN spreads was a $10 move up left you with the same value for the straddle, but a $10 move down left you with a roughly 10% upside (near term options), and the ATR for AMZN is $10 / hr, so is it a reasonable trade? Cough up 2% for B/A spreads, another 1% for decay, leaving 2% profit on an average 5% upside trade, with occasional large upsides (probably twice a week) - run it twice a day as a 90 minute trade - in and out on a time basis.
 
IMHO, lots of moving parts in that kind of trade- you have the IV curve across the strikes to deal with as the price of the ticker moves up/down. At the same time, you have to deal with the base IV of the ATM that shifts up on AMZN bear moves, and shifts down on bull moves on the ticker. TO further complicate, the 2 aforementioned factors behave differently depending on when the AMZN moves happen (ie days till exp) and the magnitude (1 or 3 sigmas) and the velocity AND add to that "public " reasons for the move which also affects the 2 factors above.Is thre news pending,etc? So it is not that clear cut how to "arbitrage" that phenomenon bec it is hard to replicate.
 
I think the question is more like: "Is there an edge for a trade capitalizing on the strike of the minimum IV point at trade launch?" A straddle may be of interest. (not necessarily straddle with lowest cost). Something to ponder...
Caveat: Some brokers don't provide accurate IV (such as TOS), but may be close enough. -- have not tested for this.
 
There is no true edge in straddles...as they say... there is no free lunch.
In the money, at the money and out of the money options all generally have their pros and cons. and applicable risks and rewards. and more or less, already priced accordingly.

The only true edge or skill in trading is being able to anticipate the future of what you're trading and/or to manage and tame it well.
This sentence sounds both incredibly basic and complex at the same time, so make sure you truly digest it and are able to apply it for the real world environment.

Trading doesn't have to necessarily equate to Gambling, as so many people seem to interchange the two.
With gambling you are severely limited in your control and outcome and options, no pun intended.
Gambling is like being a caged, servant, slave circus animal. -- While Trading, you're still that same animal...but free, in the Wild,...and it will require your cleverness and skill and ingenuity to survive and thrive,
 
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