Newb Q on Selling strangles into earnings to profit from IV dump

trader56 · Jul 8, 2006

Thanks, MTE!

So, since higher volatility, in general, contributes to higher option prices, then the option price decreases as volatility decreases, right?

I'm thinking that the more the options are ITM, the greater the effect, and vice versa?

Thanks again!

volatilitypimp · Jul 8, 2006

Quote from trader56:

I'm thinking that the more the options are ITM, the greater the effect, and vice versa?

Vega(an options price sensitivity to a change in implied volatilty) is GREATEST for ATM options and decreases the further you go in either direction OTM or ITM.

RichardRimes · Jul 8, 2006

Quote from momoneythansens:

Completely agree, wouldn't dream of running a long dispersion strategy under current climates! Not nearly enough juice to short on the indices for a start.

Not comfortable with short/reverse dispersion either so I'm waiting for the right set-up.

Thanks IV.

Hey Mo since the thread has been re-opened (good thread BTW) your quote was back in April (29th) with the increase in vol's have or did you do any dispersion's? long or short?

And correct me if I'm wrong but isn't IV drop more pronounced on ATM rather than ITM? I believe Riskarb said to do the straddles ATM or slightly OTM if you had a directional bias.

xtrhvydty · Jul 8, 2006

grab some onion dip and a good chair..

http://www.iseoptions.com/webinar.aspx

http://www.888options.com/seminars/webcasts.jsp

http://www.interactivebrokers.com/en/general/education/priorWebinars.php?ib_entity=llc

trader56 · Jul 8, 2006

Glad to see this post "resurrected," and thanks to all for the contributions!

momoneythansens · Jul 8, 2006

Quote from RichardRimes:

Hey Mo since the thread has been re-opened (good thread BTW) your quote was back in April (29th) with the increase in vol's have or did you do any dispersion's? long or short?

No dispersions executed. It's not top priority for me and I'm not in a rush. Still working on basket selection methodology and getting some relevant software built when I can be bothered....there will always be another market correction coming along

, favoring the research of other statistical (risk) arbitrage strategies in lieu and also looking at CAC40 et al as alternatives to Dow. Need a few more hours in the day though...

And correct me if I'm wrong but isn't IV drop more pronounced on ATM rather than ITM?

Well, as VP pointed out vega peaks ATM but you might also want to look at possible skew flattening effects on OTM options etc.

I believe Riskarb said to do the straddles ATM or slightly OTM if you had a directional bias.

Well, I'm beginning to suspect he knows what he's talking about

Nothing wrong with positioning straddle to meet delta preferences but this strategy is essentially volatility arbitrage and hence I favor market neutrality in general though you can take advantage of the known direction/volatility "correlations". I know IV_Trader has suggested a directional aspect to his execution depending on forecast.

Given that directional trading appears to be one of your strengths you may feel similar.

MoMoney.

RichardRimes · Jul 8, 2006

thanks

IV_Trader · Jul 8, 2006

July +dis
Without going into greeks ... that;s what one want to see when trading dispersion (+).

Best performers (up) AA , 12 , GM , 16 , MO , 10
down: BA , 7 , HD , 4 , MMM , 8 , WMT , 5

Index(short) -.90

could not attach file , but you got the idea

riskarb · Jul 8, 2006

doc is busted.

riskarb · Jul 8, 2006

RR: All straddles are itm/otm by definition. I was referring to carrying deltas // neutral, unless you're pinned to your short strike.

Mo: I love the CAC40 for exotics. It carries vols nearly as rich as the DAX w/o the daily sigmas. I replicate with CAC and DAX all the time -- long dax and short CAC vols.