Straddles, are they ever profitable?
- Thread starter TradeCat
- Start date
Let's say there is an asset costing a $100 with volatility of 50%. What do you think will be the delta of a 1 year $100 strike call? Or, a slightly different question - what amount of underlying asset do you have to short to be direction-neutral on the very first day after you buy it?
are you using a stoch vol model to calculate the extra delta ?
Asking because I've used a simple lin reg model. worked well for me. But I don't hedge very often (delta band is rather large). Now as I want to increase the hedging frequency, wondering if need to use a more sophisticated model.
I do not and the stuff I do is very finicky anyway (due to some bizarre bid/offer imbalances) so I am not a good example to follow.
It all depends on your aims. On the gamma end, like the front expiration, you should not really care that much at all. If are you mainly trading vega, you do want some sort of a smart backbone model. Linear regression works and is a shortcut to SABR-style models which assumes you have an idea about the backbone from historical data.
Updated results from my original post. This is one full month's results. I'm still playing with and learning from this (with a real-money account though). I may have done even better if I hadn't been on vacation off the grid the last three days when we had a lot of earnings releases. I'll have to back test the results and see how they would have likely played out for me.
Sorry for posting off-topic. I won't post about short straddles anymore.
I would think that any time IV in a stock is low and you may foresee that IV may rise and/or the underlying may make a large move in the future then a long straddle may be appropriate. Now the trick is when to find when a stock may make a large move or see a rise in IV enough to overcome theta decay.
As far as predicting a large underlying move, there are many approaches that breakout traders try to look at, like threatened support and resistance levels, or price compression or squeezes. There are several well-documented technical approaches to consider here.
As far as anticipating a rise in IV, it usually rises when uncertainty rises like before a news event or earnings release. So you can consider straddling up 2 weeks or so ahead of a release but you will be paying theta into earnings.
IV also rises when a stock makes a large down move as fear about the stock's prospects become uncertain. So predicting a large down move, like maybe over-bought situations, might be useful because if it stays over bought your long call will profit and if it finally does reverse your long put will kick in. Also, IV is usually low when stocks are in a bullish run in an oversold condition so the straddle would likely be more affordable.