I don't really see the logic in this statement. You have a vol model and if you feel implied vol is cheaper then your expected realization, you buy it. If your model is correct, you keep doing it and eventually you get statistically significant results.
Income? As in if you are a seller of vol, it's income? Jeesh... You only really care about the difference between realized vol and implied, thats your "income".
Okay the logic behind that statement is this.
One month is too short because long straddles suffer theta decay. So unless you are expecting a huge jump within a month, don't go into that trade. I go for 60-80 days while entering a straddle.
Income as how MARKET MAKERS refer to it.
I learned how to trade straddles while working for a MM.
MMs group certain positions under certain categories.
Straddles fall under "speculative strategies/trades".
So according to a MM, straddles are not trades that
produce monthly income.
I am NOT talking about the definition of the word "income". Gee.
Okay the logic behind that statement is this.
One month is too short because long straddles suffer theta decay. So unless you are expecting a huge jump within a month, don't go into that trade. I go for 60-80 days while entering a straddle.
Yes, your theta-gamma decay would be inversly proportional to square root of time to expiry, but so is your gamma. As long as you are delta-hedging frequently enough and your realized vol is higher then your implied, you would be ok. Unless you are making some sort of realized vol statement (e.g. you model tells you that vol cycles in 3months, not in one), there is no difference.
Quote from DerivativesG: Income as how MARKET MAKERS refer to it.
I learned how to trade straddles while working for a MM.
MMs group certain positions under certain categories.
Straddles fall under "speculative strategies/trades".
So according to a MM, straddles are not trades that
produce monthly income.
I _was_ a market maker at one of the IBs (was running their swaptions book) until a year ago and I have _never_ heard this distinction. You are either long gamma or short gamma (possibly in combination with other greeks) and decision depends on the richness or cheapness of implied vs realized.
I´m not trading the long straddle by volatility, I´m trading mechanically in a method I´m not yet sure if it works.
If I had to say what the issue is, it's the fact that you believe in a "mechanical" system. Instead, you should build yourself a model of some sort that would tell you if now is a good time to buy vol or not. While you might have a right idea on the general bias of vol (e.g. implied vol for indices and other liquid instruments is usually rich), you need to have some sort of tactical tool that will tell you if this is the right time to enter into the trade.
I´m trying to fit the long straddle into a shorter time frame. One week, or 5 trading days. This of necessity in the short period I am doing it means that the commissions become an ever increasing cut of the profit. I think right now it works out to about 30%. I can see where I could shorten the time span, but the commission part, would increase as a function of the gross profit and not leaving much net profit.
I would not qualify under the DAY TRADER RULE I think? With a 5 day straddle, I believe I can do one completed straddle trade a week. Since I leg into the straddle, I am not at all sure how many trades that would be considered. If I was to shorten the period of the trade, I believe I might close two or even three straddles per week. I kind of believe, but I am guessing, that the PUTS and CALLS would be treated individually, even though I am actually trading long straddles. If I go to a shorter period I would end up with higher commissions, but it looks like I could do 3% net profit per week. Besides the threat of Damocles Sword over my head with the DAY TRADER RULE business would wreck my strategy. By legging in, I get to shave off some price on the entry, which all helps.
So I am going to finish this test and then research a LEAP OPTION type of trade, which might run a month or two.
Well I am trading SPY. I do not usually consider volatility in SPY as it is rather staid in that sense.
However, I plugged the IV into TOS to see what we have and on the 128 strike the Call IV is 15.75 and the PUT IV is 16.96
Not sure what any of this means tradewise, as a day or two back it was reading 17% thereabouts.
