Is this a good strategy for volatility?

[JSOP]

WITH OPTIONS: I can use a long straddle, so I don't care if it goes up or down, I just need a strong movement, and the probability of that is near 100%.

The problem is you won't know whether they will be a strong movement or not beforehand unless you are insider trading which is illegal. And by the time when you do, the price of the options would've already become very expensive. Plus you won't know how strong the movement of the underlying is going to be. If the movement does not happen to be very strong, straddle is VERY expensive and will lose value fast.

Buying straddle is like buying the lottery hoping one day you will hit the jackpot. And trust me, strong movement like these will only come once in a blue moon and majority of the time you will be buying straddles for nothing unless it is an extremely volatile stock to begin with but then in that case, the price of the straddle would've been already adjusted to reflect the volatility.

 

[tommcginnis]

But if we can trade options as fast as we want, then I don't understand how this strategy could fail, it does not make sense to have an strategy with 100% of success :/

Example:
if I short the stock directly, I need to be on the right direction, I could even loose a lot of money if I'm wrong.

WITH OPTIONS: I can use a long straddle, so I don't care if it goes up or down, I just need a strong movement, and the probability of that is near 100%.

I feel I'm not seeing the whole picture, what I'm missing here? what is the risk with using long straddles for example in a situation like this (Note: options should be bought on the first 5min, and then take the profit on the next hour as much approx)

What is your strategy? Have you defined one?
It makes a *lot* of sense to have a 100% Success strategy. A LOT.

What you're missing re long straddle is what ElOchoCinco (and others!) wrote of, above: the volatility triggered by the event movement will inflate the price of your straddle at entry (no matter how well it is placed -- a whole separate question). As the event shock dissipates, even if the stock moves further down and strengthens your put position via delta dollars, the loss of vega will bleed value from both the call and the put, sucking life from your exit, no matter price movement/delta assistance. AND you've got theta tick-tick-ticking the whole time.

SO,
1) the vol of the event triggers an inflation of vega for your entry price
2) even if the stock moves away from your perfectly-placed bottom, that delta assist will be battling the continued loss of vega if the stock climbs, stays the same, or even descends away from the (perfect!) entry slowly enough.
3) in the meantime, theta is doing you no favors to your long stock position. "Tick-tock, tick-tock, Clarice!"

 

[enriquep]

I thought it was much easier to calculate

The strategy was basically to take advantage of the really exceptional movement, because the stock at time 0 is quiet, the implicit volatility is low, but then some really important news appears (when market is open) and in 5min the stocks moves A LOT (and will probably continue moving during 30min).

If I got it right it won't work because the options price will be already really high even on the first 5min, and we will need not only a big movement but a really big movement to make some profit?

 

[raf_bcn]

Hi

Maybe someone can take a look at what happened with iv during that hour. I doubt the iv was the same in the first 5 minutes bar than one hour later.
In my opinion the iv increased during that hour. The market makers would keep increasing iv as they saw the downside movement was going on .
So probably if you have bouhgt a sradle in the first minutes, the iv would have helped you.

But as I said , you can go and see it for yourself. Maybe the thinkback from thinkorswim is the tool to see it.

 

[lindq]

If I got it right it won't work because the options price will be already really high even on the first 5min, and we will need not only a big movement but a really big movement to make some profit?

You have a number of things working against you.

First, the big jump in volatility is going to really screw the greeks short term, and good luck dealing with that on an intraday time frame.

Second, a very big reason that options traders suffer is they fail to calculate the impact of spreads that they'll face in the real world, particularly in a situation where volatility has spiked. It isn't unusual to give up 30% or more of your imagined profit to the simple fact that you are trying to nail an entry with a fast moving underlying and widening spreads.

And third, if by some miracle you manage to beat the long odds and escape these pitfalls, you still need to be correct in your assumptions regarding the hard right edge of the chart.

Getting involved in a chart like that isn't a fun way to make a living.

 

[destriero]

There aren't any great opps in any short-duration fly outside of the 41/45/49 bull fly. You can grab if for a buck on Monday. July 20 LTD.

 

[enriquep]

Hi

Maybe someone can take a look at what happened with iv during that hour. I doubt the iv was the same in the first 5 minutes bar than one hour later.
In my opinion the iv increased during that hour. The market makers would keep increasing iv as they saw the downside movement was going on .
So probably if you have bouhgt a sradle in the first minutes, the iv would have helped you.

But as I said , you can go and see it for yourself. Maybe the thinkback from thinkorswim is the tool to see it.

Yes my idea was to see the history at intraday level somehow, but it seems really difficult with options, there are onyl a few sites providing historical prices for options, and they are a bit expensive and not sure if they provide intraday data or just daily.

 

[El OchoCinco]

Look...the biggest thing you have against you is 100% lack of knowledge of how options work and expecting to get a crash course in a few ET posts so you can take a directional bet on a stock that is dropping.

First your set up is random. large candle on intraday chart and you are gambling the move will continue for rest of day and you can just ride it out. Well unless you can pick these ahead of time rather than look at a chart and express magical hindsight, you are not going to succeed.

Second you don't understand option pricing and how volatility plays a role (i.e. your suggestion to buy a straddle for one).

Third, mentioning 100% chanve of reward shows a deeper misunderstanding of the risk involved in taking an intraday directional bet...yes with what you are saying it is a pure bet despite your hindsight genius.

Fourth, either short the stock or go long the stock when you see a move or buy a short-term ATM call or put for leverage and start there paper trading.