Again, anytime you enter stock into the mix as a retail trader, you lower your yields dramatically. Retail traders simply cannot trade synthetics. The synthetic straddle is going to force you to lay out 5 times as much capital for the exact same return. Quiz question: there is one situation where it's better to have a synthetic straddle over the real straddle. Can anyone tell me when? Whoever gets it right gets a free cookie.
I'm not so sure about that: if you adjust every "X" point you'll lock in 20 cts every time. Reaching point "Z" will have locked you in 60 cts, whereas only using point "Z" gives you 80 cts. The point is, every time you "reset" your delta you give away opportunity in the direction of the trend. Also, gamma is at it's greatest at the center of the straddle but the zero-delta point is moved around with every adjustment, thus it will take longer to acquire new delta once you're farther out. In theory you could adjust as much as possible keeping the delta at 0 all the time. This will cost you money because the hedge instrument will be bought high and sold low. But, in theory, the amount lost will be equal to the amount of time value of the straddle at the beginning; if IV is a correct estimate of the actual established SV, you will not earn any money. In fact you will lose because of transaction- and carrying costs. So, you can only earn from this method if you do not adjust too often. You have to profit from the delta being non-zero, letting gamma do it's work. The profits are represented by the holes between the original delta-curve and the broken line formed by the adjusted position. Of course this takes discretionary choices by the trader. How wide should the openings be, should I be greedy of cautious? Riskarb's picturing of the psychological profiles is very accurate and familiar . In my opinion it is only possible to do positive gamma-scalping on straddles when you are able to predict the movements of the underlyer. But if you are able to do that, you are maybe better off just trading the underlyer proper. The attractive property of long straddles seems to be that they will gain in both directions when delta is 0, unlike the underlyer which has downward risk. But when delta is not 0 you have similar problems as with the underlyer proper, but now you also have to compensate the fact that no movement means a loss as well. Ursa..
It has nothing to do with model frequency. It's purely psychological factors. If statvol is proven to be > implied than the trade will be a winner, provided the trader doesn't fcuk it up.