Question about weekly options straddles and strangles

[syswizard]

I know one trader who purports a 95% win rate by SELLING straddles on the weeklies. I think he is using options on the index ETFs.

 

[El OchoCinco]

I personally prefer to sell straddles based on IV and analysis of the underlying but not saying it is better or worse, just easier for me to find good opportunities. I often prefer butterflies now to short straddles to control risk/margin. Easier to set and forget a Fly than a short straddle when I am not in front of trading screen all day.

 

[OTM-Options]

I know one trader who purports a 95% win rate by SELLING straddles on the weeklies. I think he is using options on the index ETFs.

Anything less than 95% would be problematic, those 5% losing trades takes a big chunk out of the 95% winning trades. He is just one bad trade away from wiping out all his remaining profits.

 

[longthewings]

One of the biggest mistakes I ever made was trying to find strategies that worked all the time. It has literally taken me years to get over this way of thinking. I think I definitely am guilty of succumbing to a "framing bias" -- meaning I want to take something as complex as the option market and reduce it to a simple story with a simple trade. This type of reductionism proved to be a fool's errand for me.

I've now trained myself to view the market as efficient on average....but the variation and uncertainty in the market is my friend. IV's pop around, the market moves....I think most of the time, options "vibrate" in a range between cheap/expensive with fair value in the middle. Realized vol is lumpy. Day 1......18%....Day 2....4%......Day 3....7%....and so on. Because of this, a straddle could be cheap Monday morning, but rich Tuesday afternoon. If I let the market ebb and flow as it will and I refine my analytical methods to be conditional on what I see in the market at the moment (as opposed to selling a straddle at 2:55 pm every Friday), I think I have a greater chance of success.

 

[xandman]

Trading options with a univariate off and on switch would be more efficiently expressed by trading the underlying. However, there are microstucture games one can play if one has access. At the end of the day, it's where you make money that counts. Unless of course, your job is too run an institutional book.

One should really be looking to trade the vol surface to optimize an exposure or trade several assets with a dispersion framework. Come to think of it. I really don't know what I am doing.

 

[newwurldmn]

Agreed. The same can be said about selling options ahead of earnings.

You can't buy or sell options without taking some view on volatility. And a high IV number doesn't mean rich just as much as a low IV number doesn't mean low

The point is buying straddles before earnings without any consideration or discussion of implied volatility is trading in the dark and hoping for luck. It is easy to say "If the move is larger than the expected move then you make money". For example, if the stock goes up when I buy calls then you make money. If the stock stays right at the strike price for 3 weeks after shorting a straddle then you make money. If.... you see the point. It is not what theoretically could happen it is what is more likely to happen. In any straddle, if the move is greater than what the premium projects prior to expiration then you make money, that is just stating the profile of a straddle.

GOOG as the best example where IV crush can eat significantly into potential profits given the risk of the position. A GOOG straddle at $100 with high implied IV will get crushed even if the stock moves $50 at the open. We have seen IV go from 50 to 30 after an earnings announcement and the stock does not always gap and run 150 points. One cannot say solely the best time to buy straddles is before earnings, the better answer is based on a person's expectation of volatility along with expected movement. It does not matter if you look at it as vega or theta, if the play is earnings then most of the time the holding is through earnings/short-term- i.e. a couple of days. If you are holding longer then it is vega and theta that work against a long straddle. In the long run you would be fighting vega loss if you bought without any consideration of relative implied volatility for short time frames.

There is no simple easy answer as to when is the best time to buy a straddle because too many other factor come into play. Not discussing IV when it comes to straddles is the same is ignoring direction when buying calls or puts.