Selling ATM Straddles

[Soon2Bgreat]

Quote from lowvoltrader:

(example avoid certain highly volatile stocks,

Out of curiousity, why would this be? Low volty stocks are just as likely to increase in volty as high ones are to decrease, no?

Besides, aren't you compensated for the higher volty stock with the high IV?

Seems to me i'd rather get paid more and have my position on for a relatively shorter time period, of course i'm simply proposing that it makes no difference in the end.

Isn't saying that choosing a low volty stock is better than a high volty stock contradictory to saying that neither the buyer or seller has an advantage?

I'm not trying to be rude or contradictory here, so please do not take this the wrong way. Looking forward to your thoughts...thanks

 

[lowvoltrader]

the traditional formula used for calculating volatility, based on averaging the log of the daily percent changes, is not the only way to measure volatility and by itself doesnt adequately indicate future volatility. (I use a different measure of volatility.) if you use the traditional measure though and you find a stock thats quieting down (say 30 day vol less than 60 day less than 90 day) I think you will have an edge. the reason the trade works is because front month ATM volatilities are pumped up relative to back months. However I'll re-assert my challenge. Calculate the cost of selling the ATM straddle (or the just OTM strangle) on all 30 dow stocks for roughly 45 days; over a period of at least twelve months; and the option seller will win, not by a little but by a lot. Obviously you'll get killed in years with huge drops like 1987. but before that drop occurred -- or before most of the other dizzying drops in history -- the market was in lala land and you can simply adopt a simple trading rule to not sell options when there's a significant increase in overall averages or the individual stock over the preceding twelve months.

 

[i960]

Are you sure, Coach?

I am pretty sure he sold straddles. When they went against him, instead of covering, he bought futures to prop up the Nikkei.

If he had done the right thing and had taken a loss, Barings might still be around.