Long and Short ATM Straddles are Dead Money - But a very accurate indicator of future stock movement
- Thread starter OptionGuru
- Start date
Wait till expiry, it should be more clear. Both the long and short straddles should break-even - at most a small profit or loss not worth the risk. They are dead money not worth trading.
Ok, lets take this idiocy apart.
1. an options MM is pricing vol, not options - since they are delta hedging, their p&l is not dependent on the terminal distribution, but only on the incremental path of realized vs implied volatility
2. despite large number of buyers and sellers, implied volatility would generally be structurally higher, since the seller wants to be compensated for the short convexity position
3. liquidity in the underlying does play a huge role in this process, since delta hedging requires stock liquidity and signals the market to take the opposite positions
4. the points 1, 2 and 3 above do suggest that you can somewhat predict the expiration price for large delta hedged positions that outsize the underlying market, but it's pretty hard
5. if you have testicles and capital of sufficient size, you can create these situations artificially (i.e. put-bomber pre-08 and such)
6. pretty much everything in the OP is total bullshit
1. an options MM is pricing vol, not options - since they are delta hedging, their p&l is not dependent on the terminal distribution, but only on the incremental path of realized vs implied volatility
2. despite large number of buyers and sellers, implied volatility would generally be structurally higher, since the seller wants to be compensated for the short convexity position
3. liquidity in the underlying does play a huge role in this process, since delta hedging requires stock liquidity and signals the market to take the opposite positions
4. the points 1, 2 and 3 above do suggest that you can somewhat predict the expiration price for large delta hedged positions that outsize the underlying market, but it's pretty hard
5. if you have testicles and capital of sufficient size, you can create these situations artificially (i.e. put-bomber pre-08 and such)
6. pretty much everything in the OP is total bullshit
Option trading is all about volatility - any idiot who trades for a while knows that!
As the little suckers that cling onto the sharks, we need not worry ourselves about the intricate workings of MM's and hedging, as that is indeed a complicated area that billions of $$$ is spent on, made, and lost!
Our goal, as the "suckers", should be to perfect our timing, as this automatically increases our odds of winning - fuk the MM's and their billions of dollars infrastructure.
To make money all you need to do is GET IN and then GET OUT at the right time - the better you get at it, the more you will make!
Deep down I know I am wasting my time with options analysis, but, it is interesting, and I like interesting things as it keeps the mind active and stops the dreaded Alzheimer's
J_S