Straddles, are they ever profitable?

[Jones75]

Not an options guy, hoping some of you experts can weigh in.
We all know about IV crush following a scheduled event. Earnings, FDA, etc.
But what is the typical IV decay profile post-event? As an example, let's say a company is reporting earnings in afterhours. Assume conference call scheduled for next day at 10am. Assume weekly ATM call/put is pricing in a 10% move one way or the other. Now assume the stock opens flat the next day. At the open, how much would the IV typically drop? Might look for excessive IV crush where we can get long a straddle and profit from large realized in the next day or two. Thoughts?

Compare your Ivol to the last 30 day statvol, take the difference, and plug in the vega to give a rough idea of the dollar amount of a possible crush.

 

[tradelosses]

the inverse etf method is effective because the inverse ETF will always make a new low before the underling index makes a new high.I It doesn't even have to be leveraged.

 

[sle]

the inverse etf method is effective because the inverse ETF will always make a new low before the underling index makes a new high.I It doesn't even have to be leveraged.

These days short borrow fees on leveraged ETFs are so high that they are pretty much fully offset your volatility gains.

 

[phattails]

Not an options guy, hoping some of you experts can weigh in.
We all know about IV crush following a scheduled event. Earnings, FDA, etc.
But what is the typical IV decay profile post-event? As an example, let's say a company is reporting earnings in afterhours. Assume conference call scheduled for next day at 10am. Assume weekly ATM call/put is pricing in a 10% move one way or the other. Now assume the stock opens flat the next day. At the open, how much would the IV typically drop? Might look for excessive IV crush where we can get long a straddle and profit from large realized in the next day or two. Thoughts?

That question is entirely dependent upon the market, the amount of analysts tracking it, the bid ask spread, etc.

 

[Ashok Yarlagadda]

Straddles and strangles are priced based on expected market moves. IV is adjusted by market makers to manage the risk they take in options market. This makes it hard to make money on straddles and strangles. However, there are some good setups like triangles, contraction, earnings that suit for trading straddles and strangles. Good way to design a strategy that meets your risk-reward expectation is to back test. Try http://www.key2options.com and trade commission free when you open an account with tradier brokerage

 

[CBC]

The thing is,

if they aren't profitable then how are the MM pricing them? If they are never profitable for buyers then you are saying if you go and take every bid off the market as a seller then you are guaranteed to make a profit.

 

[ironchef]

Straddles and strangles are priced based on expected market moves. IV is adjusted by market makers to manage the risk they take in options market. This makes it hard to make money on straddles and strangles. However, there are some good setups like triangles, contraction, earnings that suit for trading straddles and strangles. Good way to design a strategy that meets your risk-reward expectation is to back test. Try http://www.key2options.com and trade commission free when you open an account with tradier brokerage

My interpretation from Ashok's post is the market is quite efficient and there is no advantage either mechanically buying or selling straddle/strangle.... As a retail trader, I will net zero minus commissions and slippages if I trade often enough.

Is this the principle of no arbitrage, any advantages in trading will very quickly be arb away?

So how does a small retail trader like me make money trading?

 

[Jones75]

My interpretation from Ashok's post is the market is quite efficient and there is no advantage either mechanically buying or selling straddle/strangle.... As a retail trader, I will net zero minus commissions and slippages if I trade often enough.

Is this the principle of no arbitrage, any advantages in trading will very quickly be arb away?

So how does a small retail trader like me make money trading?

Directional, with above average money management skills, IMHO

 

[ironchef]

Directional, with above average money management skills, IMHO

Agree. But I often got the directional wrong and had poor risk management skills, often rode the options up but ended up down in the end. Why? Because I was told: Let the profit ran.

 

[sle]

Is this the principle of no arbitrage, any advantages in trading will very quickly be arb away?

No. Arbitrage is a relationship that is easy to lock in and collapse. It is rare and between stuff like violations of put/call parity and yes, it will be very quickly captured by electronica market makers.

Instead, this is about the market price of risk. Implied volatility (which dictates the price for straddles) is not any different then any other risk premium in the market and there will be some equilibrium in MMs trying to figure out what it is really worth. That price is composed of two components - (a) the actual expectation of volatility and (b) the risk-tolerance of the market participants to a position.

So how does a small retail trader like me make money trading?

You are thinking about this all wrong. A small retail trader has a number of qualitative edges that put him in a unique position to make money - you are small, you are not subject to regulatory bullshit, you are not mandated to trade a specific asset class etc. As they say "I'll let the reader fill in the blanks".

PS. Ashok, I have to say that http://www.key2options.com/ looks like a waste of money to me