Thank you. If your edge is in the "scalper" which has embedded "strict stop loss", I don't really see the value of the straddle.
Do the majority of the profits actually come from the scalper or from the straddles?
I have been pondering on a similar idea but in a reverse way ... Buy a strangle around a consolidation channel and run a mean reversion strategy for the purpose of paying for time decay. Trying to catch those fat tails on the cheap
Ok, lot of interesting stuff in your question.
"Trying to catch those fat tails on the cheap" is a sort of "lottery attitude" of those buying strangles/straddles. And we can't deny that lotteries are a lot popular, even though we all know too well that the chance to win is ridiculously small.
Undeniably, many people need to
feed their dream, that one day one of those tickets, each of which seems relatively inexpensive, will bring a large win (your "fat tail"). And, even if that does not happen, they had anyway a dream to carry on. And, sometimes, dreams are even more important than their actual realization.
On the other hand, thinking rationally, it is obvious that merely buying strangles is not leading far. Same for the opposite strategy, of selling them. We could say, that one might choose between 2 different and somehow opposite ways to lose money.
For what I have determined, in this approach the "edge" is
not the 1-contract "scalper", which by itself would be an unbearable proposition, nor the strangle. It is, instead, the precise combination: scalper (with a specific algo, of course) + strangle (repeated on the instrument price range) which is expected, in the long term, to converge to a profit.
As you very intelligently noticed there are 2 ways, both legit, to look at this combination. You can think of a
scalper "protected" by a strangle, or conversely, you may think of a
strangle "financed" by the scalper. Whatever perspective you take, it does not really matter, because it is precisely the combination of the two the only one which has hope to generate your edge.
As I mentioned in my first post, I duplicated the strangle, and the reason is that I was expecting that the combination of scalper + 1 strangle, should generate, in statistical terms, enough edge, to also buy a "lottery ticket" (the second strangle). This in recognition that the psychological aspect is also important for a trader, and we do need to be able to dream.
