what type for strategy is best to use to profit on volatility?
- Thread starter jgold310
- Start date
Absolutely. I can't imagine any experienced trader recommending one to limit short straddle positions to one month duration. It's what NOT to do. With duration comes vega exposure. IMO, the only time to sell a straddle is on a deferred contract to increase vegas and decrease gammas. It's best to add curvature/dgammas to any front-month straddle position through the purchase of wings [long flies]. Your loss is limited on the otm strike-touch and you flip gamma/vega outside the wing-strikes.
I understand about synthetic straddles but wasn't going to try and cover every possible trade and all it's synthetics in a single post. Also I never said that volatilty couldn't or wouldn't move higher with the price. I said that "selling a straddle is more profitable WHEN volatility is high and moving downward". Meaning that if the options you are selling are over priced when you sell the straddle but are starting to move downward you would capture a larger premium. I was not talking about any specific stock.
If you sell a straddle you are generally expecting the underlying to stay between the break even points. Price action and volume will be the primary indicators as to if this will happen or not. Yes you should worry about Vega but it is not THE primary thing to be concerned with.
While I agree that there are advanced methods to repair or roll a straddle to lock in profits, or reduce risk, I considered repair strategies and rolling strategies as out of scope for this thread.
If you are not advanced enough to know about all the rolling and repair strategies then selling straddles on longer timeframes gives the unerlying more time to move out of your profit range. I can't imagine an X-Games pro biker trying to teach a 6yr old thats just learning to ride a bike arieal acrobatics.
Repair strategies are anathema. Adding negative edge to a loser. Who is the six year old in this analogy?
Let's try to stay objective and leave the (ugh) repair strategies out of the discussion. Adding duration allows one to increase vegas while decreasing gammas. Don't recommend two week short straddles to noobs.
Lol no I am not the 6yr old. I am not the X-games pro either. I am more like the parent that knows how to ride a bike quite well and can teach others to ride but not all the advanced tricks. That I will leave to you. I still say telling noobs to take much longer term short straddle postions will only lead to their ruin if you do not also teach them all the ways to modify the trade as time progresses and things change, which gets a bit advanced for a forum thread in most cases. Personally I never use straight straddles anyway. If I think the price will be in a certain range, I will use IC's or Dbl Diags (often rolling into a IC) to limit my downside and widen the profit range.