Markets for Short Straddles

Quote from Martinghoul:

I don't see how you can make such sweeping generalizations and decide that some mkts are good for being selling vol, while others are not so good. Surely, that has to depend on what price the mkt bids vol at, which varies a lot.

All else being equal, what you're suggesting by saying that, for example, 10y notes is a better mkt for selling straddles than spooz is that the bond futures mkt systematically overprices vol more than the equity mkt. That's a rather bold statement.
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Yes, the final choice of which markets to use for straddling--or any option strategy--must be based in large part on the status of IV, specifically its position relative to its own range and whether the risk priced into it is being exaggerated. I stated as much, and offered a hypothetical condition whereby all the candidate markets had equally expensive options. That happens often enough. Right before the new year, there were at least 10 futures markets with IV in the top decile of its annual range. Even if we predict that the premium in all 10 of those markets is inappropriately high--that the risk being priced into the options is unwarranted--perhaps there are still markets that shouldn't be traded as short straddles. Are there markets that should be avoided no matter what because they trend hard and fast or pop explosively? Conversely, are there markets that tend to mean-revert more, or chop aimlessly more than trend, or trend gently? I can imagine how that latter type of market is more suitable than the former for short straddling. If both types of markets were at the height of their IV for no good reason, I might sell straddles on the latter, but not the former.

I'm not saying the 10-year bond market is systematically overpriced relative to the S&P--that of course would be completely false. What I am suggesting is that the short-term bonds are a sleepier market than, say, soybeans or natural gas, and thus a short straddler of the 10-year is less likely to suffer the consequences of a protracted trend. Is that too completely false? Some folks here have clearly stated that certain markets are better than others for straddle sales, citing the notion of tameness as a factor in market choice. It sounds like Martinghoul doesn't believe any one market to be tamer than any other, when the absolute IV is taken into consideration. That was my original question: Are tame markets better than wild ones for short straddling, considering that the wild ones have commensurately higher IV to compensate for their unpredictable performance?
 
Quote from Deus Ex Machina:



You should listen to the people who are telling you straddle selling is high risk. Many, many people -- including highly experienced traders -- have blown out accounts by selling volatility. Exhibit A: LTCM. Exhibit B: Niederhofer. Exhibits C-Z: a large number of option selling managers in 2008.

The problem is that the return is low but frequent, so traders discount the tail risk and put on bigger and bigger positions. Eventually this leads to a huge loss when an outsized market move comes along. And it's not possible to hedge against this loss.
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Thanks for responding. As you were saying, the key is not to get greedy. The examples you cited all used egregiously excessive leverage. Put sellers in '87 got burned to the tune of millions due to leverage. Meanwhile, a put sale is synthetically equivalent to the oh-so conservative covered call. My point is that short straddles are really no riskier than a strategy like a covered call! I submit they are actually far less risky if begun delta neutral, which a covered call never is. A solid trading plan whereby tail contingencies are manageable is the key to avoiding major losses.
 
Quote from stevenpaul:
Yes, the final choice of which markets to use for straddling--or any option strategy--must be based in large part on the status of IV, specifically its position relative to its own range and whether the risk priced into it is being exaggerated...
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Yeah, I think what I am trying to say is that, in general, all these options mkts are fairly priced, such that systematic selling of vol doesn't produce meaningful excess returns. That is, the notion of "tameness" is well priced by the participants in most modern mkts over large periods. I could be wrong, but I, for one, am not familiar with anything that indicates that any contemporary mkt systematically overestimates vol. Interestingly enough, there was some literature suggesting that, in the not so distant past, the bond mkt (or, rather, rates) used to misprice autocorrelation that is an inherent feature of interest rates. This would imply it would have definitely been a better mkt for selling vol than the others. I believe this is no longer the case, but maybe old habits die hard. Maybe some people still believe that us rates peeps are still stuck in our old silly ways.

It's yet another question which mkt offers more short-term opportunities arnd specific mispricings of certain options and which mkt is potentially mispricing liquidity or lack thereof.
 
Quote from oooooo:

Well, this topic just begs for opinion from self proclaimed gurus. So I will remain silent here :).
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No need to be a guru to contribute. If you have a thought, please share.
 
Volatility and straddles ==

An instructive exercise is to look at straddles just prior to earnings. Volatility is the market's assessment (guess) where the market price will be after earnings.

How often was the market wrong, and could you make money by outguessing the market long-term. You either go long, or short depending on your assessment.

If you discover that you are good at it, then straddles are for you.
 
Looking for good reasons as to why I'd be better off shorting straddles whilst hedging with the ES as opposed to trading ICs outright?
 
trading a short gamma position all comes down to how you manage your gamma. if you aren't hedging your gamma and are just looking for premium to come in, i'd hope you have some decent timing or use some strangles instead.

the argument that you shouldn't sell straddles because vol could explode is invalid. vol moves in both directions, sometimes slowly and other times rapidly. it doesn't matter whether it is increasing nor decreasing.

if you want to do this for an event where vol has gotten very bid, you may just buy calenders and try to leg out of them as the vol comes down. the front should usually crash the hardest.
 
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