Volatility plays

CaptainObvious

CaptainObvious

I asked the question below in a stocks thread. Perhaps I can get it answered here. Thanks!
OK! I'll leave myself open to a reaming here, but if I learn something it's worth it. It doesn't look to me like a straddle would be the right trade for this. If I understand correctly, the best time for a straddle is when Implied volatility is less than the Historical. That doesn't seem to be the case with ALD. Seems the options would be overpriced.
Using an example of my Neanderthal way of figuring right pricing, I'd take the difference between the high/low of the last 60 days or so and divide that number by two. If the cost of the straddle is less, it's priced favorably.
Using rounded numbers ALD had a high of 33 a couple months ago and a low of 28 last month. The diff is 5/2=2.5
Now if I look at the May options I can buy ATM calls/puts for a total of 2.90 which is higher than 2.50. That tells me the pricing is not favorable to a straddle.
On the right track? Be gentle, it's early
 
I don't know that IV being less than HV necessarily dictates a "cheap" option. I find it better to look at an IV chart to determine if IV is cheap or not.

Also, a straddle as a vol play strikes me as expensive. Something like a calendar or diagonal is good if you're expecting vol to rise. Selling a calendar or diag is good if you're expecting it to fall. With the straddle, your theta risk seems like it could outweigh your "correct" vega forecast pretty quickly. Unless of course, you're expecting a quick spike in vol and exit if it doesn't materialize.

For the sake of disclosure, I don't trade straddles (don't like the low probability of profit), but I do trade cals and diagonals.

Just my two cents.
 
(I assume you want to "buy" the straddle.)


If I were attracted to buying a Straddle I would first look for the IV to be nearer the bottom of it's own 6 or 12 month range (as a percent). For example, if the ATM IV were .09 today but the last six months ATM IV bobbled around between .63 and .09 then the possibility of putting one on would have passed my first screen.

I don't buy straddles myself though - I'd much prefer to sell time value when IV is at the other end of the range.

Just another view.

Peace and gtty,

Lar
 
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