How to realize buying cheap vol

[destriero]

hi destriero, so when you say "think of vol as synthetic time" do you mean think of implied vol or realized vol as synthetic time? Just to clarify, if you put on a straddle "x" for $2 and 1 week later it is still $2 for whatever reason, how does the above comment apply to this position X? Thanks.

Implied, but it can apply to either. You buy the 50/55 combo at $3.00 at 20% annualized. IV is unchanged and the 50/55 combo is trading at 2.30 in two weeks. Time as synthetic vol reflects the loss to time at static vol.

So the discrete hedger needs either an edge on stat over implied or vice versa.

The trader needs a rise in IV to breakeven on the combo (static Px), or he needs a rally in stat-vol to compensate for the loss to synthetic vol (time). This excludes being correct on stat vol but the distribution being lepto. A lot of ways to lose on discrete hedging of long gamma.

I like to quote the story of my buddy at NYMEX getting pinned on a straddle and losing everything.

“For the want of an eighth the kingdom was lost” (pre-decimalization)