Volatility Trade - months and strikes

[erol]

Hello,

So I'm paper trading a volatility trade here on LFT.

IV has been pretty low, and I projected an increase in IV since this thing has rallied so much in the last little bit. Since nothing lasts forever, and IV rises when things fall, I figured it was a matter of time.

So I was a little right today, however my position didn't make money.

I'm long 23*40 Jun straddles and I've been gamma scalping to stay delta neutral (basically, today I got to cover my paper-traded shorts). This position gives me >400 vegas right now.

I bought far out to get highest exposure to vega. But since it's so far out, the increase in IV was not reflected in this months option series.

But if I buy too close to expiration, vega has less of an impact and theta is very high.

I wanted to know, what is the "optimal" timeframe for such a trade? How many months out does one give themselves to maximize a change in IV with exposure to vega.

Furthermore, there's buying ATM vs. OTM straddles.

If I think IV will rise due to a sharp decline, should I buy OTM straddles below the spot so that I'm close to ATM when the udnerlying falls? This is a directional play which i thought wasn't the point of vol trading.

I'm just trying to understand how to best profit from this, when apparently I'm a little bit right!

Thanks in advance.

 

[nazzdack]

Quote from erol:
.....how to best profit from this, when apparently I'm a little bit right!

1) An ATM straddle is a "straddle".
2) An OTM straddle is a "strangle".
3) If you're price-bearish and expect a rise in implied volatility, you may want to focus on put-only strategies and not tie up money in call options.
4) OTM puts that remain OTM during the price decline should provide the most "bang for the buck".
5) Time wise, 4 to 6 months out should be ideal. You'll avoid a greater degree of time decay and get the vega you desire.

 

[heech]

Seems to me you'd need a *very large* move in statistical volatility for IV 6 months out to be significantly affected. I doubt there's really a closed-end solution to your question... but I personally would bring it in quite a bit.

But of course, the other side of that coin is you have many more opportunities for gamma scalping. I guess you have to decide how effectively you're gamma scalping, and how important that is to overall returns.

 

[xflat2186]

Quote from nazzdack:

1) An ATM straddle is a "straddle".
2) An OTM straddle is a "strangle".
3) If you're price-bearish and expect a rise in implied volatility, you may want to focus on put-only strategies and not tie up money in call options.
4) OTM puts that remain OTM during the price decline should provide the most "bang for the buck".
5) Time wise, 4 to 6 months out should be ideal. You'll avoid a greater degree of time decay and get the vega you desire.

An otm straddle is not a strangle. A strangle would have different strikes where as a straddle has the same strike in call and put same expiration.

 

[nazzdack]

Quote from xflat2186:
A strangle would have different strikes where as a straddle has the same strike in call and put same expiration.

1) You are precisely correct in your definition. I was slightly accurate.
2) I was thinking the original poster was misnaming a strangle as a straddle.
3) With straddles and strangles, for me, the options traded are never initiated (ITM) in-the-money.

 

[heech]

Quote from nazzdack:

1) You are precisely correct in your definition. I was slightly accurate.
2) I was thinking the original poster was misnaming a strangle as a straddle.
3) With straddles and strangles, for me, the options traded are never initiated (ITM) in-the-money.

I'm not usually this much of a pain in the ass...

... but just note: very difficult to initiate a straddle where *both* options are NOT in-the-money.

 

[xflat2186]

Quote from nazzdack:

1) You are precisely correct in your definition. I was slightly accurate.
2) I was thinking the original poster was misnaming a strangle as a straddle.
3) With straddles and strangles, for me, the options traded are never initiated (ITM) in-the-money.

No biggie, but I would also say you were not accurate at all.

One leg or the other in a straddle is going to always be in the money other than a stock sitting exactly at strike.

 

[MasterAtWork]

Quote from heech:

I'm not usually this much of a pain in the ass...

... but just note: very difficult to initiate a straddle where *both* options are NOT in-the-money.

Both could be at the money !