Question about Short Straddles

A

amit.mahajan12

I have a pretty basic question about short straddles. Would the following strategy work? My guess is no because I didn't find any source talking about it online, but would like to understand why.

Sell an ATM straddle a couple of months out (where I own the underlying stock and have cash collateral for selling cash-secured put), and then adjust the straddle to follow the stock price as it changes over time to make sure straddle stays ATM. So if the stock moves higher, move straddle strike price up, and same for lower. My guess is that the adjustment should not cost much (I did a couple of such adjustments today on NIO and got credit for it). If the stock does not move much for a few weeks the transaction can be closed with the time decay gains, or continue adjusting till it gets closer to the expiration and close then.

The downside that I can think of would be that adjustments may cost more than the overall gains? But I didn't find any data about it at all so wondering how correct that is.
 
I find it interesting that you choose this stock to sell a straddle in as someone that has not done much of it before. Did you decide the option were too high or just wanted to try it? Why NIO?

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amit.mahajan12 said:
I have a pretty basic question about short straddles. Would the following strategy work? My guess is no because I didn't find any source talking about it online, but would like to understand why.

Sell an ATM straddle a couple of months out (where I own the underlying stock and have cash collateral for selling cash-secured put), and then adjust the straddle to follow the stock price as it changes over time to make sure straddle stays ATM. So if the stock moves higher, move straddle strike price up, and same for lower. My guess is that the adjustment should not cost much (I did a couple of such adjustments today on NIO and got credit for it). If the stock does not move much for a few weeks the transaction can be closed with the time decay gains, or continue adjusting till it gets closer to the expiration and close then.

The downside that I can think of would be that adjustments may cost more than the overall gains? But I didn't find any data about it at all so wondering how correct that is.
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Yes, you'll be looking at high transaction costs with all that activity.

There is no substitute for experience. So create your scenario with single contracts and see how it plays out. Learn from that experience.

Good luck.
 
amit.mahajan12 said:
I have a pretty basic question about short straddles. Would the following strategy work? My guess is no because I didn't find any source talking about it online, but would like to understand why.

Sell an ATM straddle a couple of months out (where I own the underlying stock and have cash collateral for selling cash-secured put), and then adjust the straddle to follow the stock price as it changes over time to make sure straddle stays ATM. So if the stock moves higher, move straddle strike price up, and same for lower. My guess is that the adjustment should not cost much (I did a couple of such adjustments today on NIO and got credit for it). If the stock does not move much for a few weeks the transaction can be closed with the time decay gains, or continue adjusting till it gets closer to the expiration and close then.

The downside that I can think of would be that adjustments may cost more than the overall gains? But I didn't find any data about it at all so wondering how correct that is.
More...

Your question of "Will it work?" is itself absurd. If it worked then volatility would need to continuously drift lower forever. Now, that can't be true, can it ? When you trade options, you trade the future expections about volatility, that's it. If you want short straddle to work then you need low(er) volatility.

Do you know what the future volatility will be ? No, you don't. So, there is no edge in that strategy.
 
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Regardless of symbol, the reason why you are wanting a short straddle itm is for the highest premium possible on both ends. Fair to consider this strategy however you should consider that it is likely that one or both ends will get executed by another party. Although volatility is priced in and you could get paid well for the risk you'll need to ensure you have enough buying power to maintain the adjustments since you want to go a month out. You'll run into trouble if the stock continues to run and you have to keep re buying to write cover calls so having enough buying power to continue the adjustments.

I would suggest looking at July 17th exp just OTM. ~40% less premium than what you were looking at but you cut down duration and volatility risk a lot which will give you more room to make any adjustments or double down on direction.
 
tsfx said:
Your question of "Will it work?" is itself absurd. If it worked then volatility would need to continuously drift lower forever. Now, that can't be true, can it ? When you trade options, you trade the future expections about volatility, that's it. If you want short straddle to work then you need low(er) volatility.

Do you know what the future volatility will be ? No, you don't. So, there is no edge in that strategy.
More...
 
tsfx said:
Your question of "Will it work?" is itself absurd. If it worked then volatility would need to continuously drift lower forever. Now, that can't be true, can it ? When you trade options, you trade the future expections about volatility, that's it. If you want short straddle to work then you need low(er) volatility.

Do you know what the future volatility will be ? No, you don't. So, there is no edge in that strategy.
More...
I am still new to options, so I do have a couple of questions for you regarding your post:

1. If in buying and writing option, I always hold to expiry, I shouldn't care what future volatility expectation is but future underlying direction and value? Since I already got paid (premium received), whether I make money or not depends on where the underlying lands at expiration?

2. An ATM straddle is essentially delta neutral, or close to it. Then by constantly adjusting to keep it delta neutral, should OP receive risk free rate net of commissions and slippages?

3. In today's zero interest rate environment, such a strategy will not be very profitable?
 
BlacknBlue said:
Regardless of symbol, the reason why you are wanting a short straddle itm is for the highest premium possible on both ends.
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May I ask why?

Usually high premium means high IV and high IV means higher probability of moving away from your position?

Another question: Why ITM instead of OP's ATM?

Thanks.
 
ironchef said:
May I ask why?

Usually high premium means high IV and high IV means higher probability of moving away from your position?

Another question: Why ITM instead of OP's ATM?

Thanks.
More...

Morning, sorry, i should have added "atm" after short straddle above. The point of a short straddle atm/itm is getting the highest premium in relation to the underlying price. You are writing a call and put with the SAME strike price. I think the only way of not getting called on the option, on paper, is if the price is exactly ATM on expiry. Triggering a ~$35 option fee is not worth it if it expires atm.

In an efficient option market, the higher the premium the more likely it gets called. If this wasn't the case I would be writing deep ITM's and never get called. Literal free money lol.

May be some confusion on terminology of itm/atm, I don't speak to option traders often, but atm is the price of the option is the exact same price of the underline which occurs extremely rarely. some people may use "atm" as the first contract option that is itm.

To answer the question of "why NIO", based on the friday's close option prices, he would have received a 50% premium vs stock price by initiating a short straddle.
 
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