I'm referring to a straight straddle - long a call, long a put ATM. How do you pick your setups? Most of what I see has breakevens too far out to look worth it on a routine basis. But maybe I'm looking in the wrong places.. If you only use straddles occasionally, what circumstances are appropriate for their use?
AFAIK, being long a call and long a put means ur betting on volatility increase. the long call and long put make you delta neutral, so you dont make money there. plus you have to factor in time decay which also works against you. A decrease in volatility will also produce a loss. i guess a straight straddle is only apt for situations where you expect a strong rise in movement/volatility - regardless of the direction of the underlying. Odds arent really very favourable imo, since the volatility increase has to be enough on both the call and put to make u breakeven from the premium you've paid for both of them.
I am a relative novice at options, but after watching a set of 10 stocks month in and month out and paper trading (e.g. NVDA, XOM, VLO) I had a series of winning straddles the last few months of 2006 on XOM. Buying the straddle when the stock hit a workable symmetric strike price. I'd considered it luck however because occasionally the position would turn profitable and I'd liquidate the profitable leg, hold the other leg and then see that one breakeven or even make money. In general however over the past few months, my gut is that buying options is for suckers(like me) and is a writers/seller's game. the fills, ludicrous bid-ask spreads and transaction costs have scared me away. I think the options are usually overpriced and benefit the sellers mostly. in summary, my long straddles have been a mixed bag, and I probably would have made more money if I was just long calls and got lucky.
You hit the nail on the head. That's why short straddle IMHO is a higher probability bet especially if the "range" is wide enough from overpriced options.
I no longer do options but when I did straddles were most efficient when the daily chart had evidence of severe congestion, especially in cases were you had an almost perfect symmetric triangle. Anek
as chugani already said , long straddles/strangles benefits from rise in volatility. You also must have an alpha type HV/IV ratio to pay for time decay by scalping.
I wonder how many short vega and gamma traders agreed with you back on 8/16 around 3.15 pm...right before rate cut's rumors saved them from beeing wiped out for ever.