Straddles

[candletrader]

Brethren,

I ain't too clued up on options (I am a simple-minded directional equity and futures trader)...

My question is as follows... for those of you who trade straddles (buy them), do you:

1) bail the straddle with a month to expiry if there has not been a profitable move (thereby saving the most significant part of time decay, and preventing the loss of the majority of the net debit)

OR

2) try and keep the position delta neutral by making transactions on the underlying... thereby letting you hold the straddle to expiration... how often would you re-balance to keep things delta-neutral, if you are position trading the straddle? At what levels of the underlying, do you adjust, in order to achieve delta-neutrality?

OR

3) another technique, not in 1) or 2)?

Thx,
Candle

 

[ig0r]

4) Dont buy straddles

 

[riskarb]

Quote from candletrader:

2) try and keep the position delta neutral by making transactions on the underlying... thereby letting you hold the straddle to expiration... how often would you re-balance to keep things delta-neutral, if you are position trading the straddle? At what levels of the underlying, do you adjust, in order to achieve delta-neutrality?

OR

3) another technique, not in 1) or 2)?

Thx,
Candle

#2 w/o question

Your edge(-edge) will be determined by your hedging prowess. Become acutely aware of the daily 1,2,3 sigmas of the stat-volty of the underlying shares.

Your immediate goal is to earn your daily decay... unfortunately, decay is not linear, decay accelerates and you'll need to earn more as time passes(on your hedge). Yes, gamma does increase as well, but this has no influence on the stat-volty, so you're reliant on a large move in the underlying or hedge gains.

Be very disciplined with your hedges; it's analogous to a pure-mechanical system.

 

[candletrader]

Quote from riskarb:

#2 w/o question

Your edge(-edge) will be determined by your hedging prowess. Become acutely aware of the daily 1,2,3 sigmas of the stat-volty of the underlying shares.

Your immediate goal is to earn your daily decay... unfortunately, decay is not linear, decay accelerates and you'll need to earn more as time passes(on your hedge). Yes, gamma does increase as well, but this has no influence on the stat-volty, so you're reliant on a large move in the underlying or hedge gains.

Be very disciplined with your hedges; it's analogous to a pure-mechanical system.

Thanks for clarifying this riskarb... much appreciated...