Right! But before that event LULU moved on average 7% with one previous move larger than 25%(when the company was still fairly new). In order to price these moves in, you would need to charge a pretty outrageous premium which may be unreasonable considering we dont really know how big the moves can be until they happen. The spreads have cost me quite a bit + the extra commission
Ya, Theoretically agree with him. It does comes to size of the trade. One needs to do more Bfly, instead of straddles structure. Another issue is fills, it is much easier get filled on straddles than Bfly.
Always. Buy. Wings. Buy them as cheaply as you can, as far out as you like, but buy them. Buy then even if you think the expectation on the individual Far-OTM options is negative (it probaby is but buy anyway). The point of buying wings is to protect against tail risk... at the cost of giving up some edge. You are on the right track, you just need to avoid blowing out your account and having to start over. Accept a slower path to your first $billion for greater chance of actually getting there. Price that TIF straddle if the move had been 50% or even 75% instead of 25% to see what the actual damage could have been. You don't have enough in your account to diversify into 200 simultaneous uncorrelated short straddles (and earnings straddles are more correlated than they appear) so you can either buy the wings, trade only the long straddles, or trade so small you risk very little on each straddle. Also, as an added bonus, if your risk controls are based on "shocking" (usually 15% against you on underlying), your buying power will go way up when you buy the wings.
Positions were really small, so not a big day, but closed both straddles for a nice winner's. AAL for 1.65 +.35 LUV for 2.20 +.45 This is a very insightful post. I will be buying the delta 1-5 wings for a few pennies and selling a straddle, only to close the straddle the following day and keep the wings as a lotto + it's a good hedge if we ever get a 15% drop in the overall market over a short time period. Will keep you guys posted on my trades today
If I take your logic to the extreme, why don't I just buy tails? Especially when they are cheap? But then how do I know whether they are cheap?
You're buying the wings at -edge. The edge loss knowing that the vol-figure is unsustainable. You can't price the gamma so you're paying for the stop. Cheap in dollars, not vol.
INTC long straddle for 2.35 WDC Short 40 straddle 3.75 BOT wings for 9 cents. LEA looks like it has a ton of edge but I have not had enough time do research. Also I recently fell in love with violin plots, they paint a nice picture. Maybe some of you will fall in love as well. Absolute move by quarter for WDC (11 samples per quarter). Anova test does not reject that any of the quarters come from a different distro. But it's nice to look at