This is the current price chart for CISCO in 5min candles: The fall was because Amazon said will probably sell network equipment. When we get news and movements like this (look at the first 5min candle, is huge compared to the others, and in volumen too), there is a really high chance to get a big volatility on the next 1 hour at least. Is possible to create some strategy with options for special situations like this one? I'm very new in options, so I'm not sure if is possible to buy/sell them so quickly, or if the prices for options changes dramatically on the first 5min and is not possible to take advantage of this volatility? What do you think?
The word of the day is, Butterfly. Whether iron, call-only, or put-only -- there are different flavor subtleties that have whole websites written around them. But if you have strong reason to believe that this is not a stable price, a butterfly squeezes in on the (target) price.
My question is more about how possible is to take advantage of situations like this with options. Because this occurs "really fast". The candles are 5min, and the strong volatility dissapear after 1 or 2 hours. Is possible to operate with options at this speed? I mean is possible to buy the options right after the first 5min huge red bar, and then close/sell them 1 hour after? or we will find a lot of problems trying to do that? for example liquidity or maybe the premium is really high? I mean what are the possible problems with a butterfly (or a long straddle) in a situation like this one?
As tommpointed out, when vols spike, FLYS are the best way to try and profit from possible range and vols coming back in a bit. When vols have mini spikes the FLYS get relatively cheaper. However you are looking to day trade the vols and that is not going to work to scalp it in an hour. best bet is maybe a weekly FLY or go 2 weeks out if stock is liquid. But no way you can scalp the vols in one hour.
Yes that's actually my question, is particular for this type of trading not a generic strategy. So you say is not possible to trade options intraday (and moreover in 1 hour or 2)? Can you explain me why that doesn't work fine with Options? it will help me to understand it better I think because I'm a bit confused right now. I mean, with CFD for example I could go short and then close the position at any time. With options this is not possible due liquidity? or there is some other problem?
Hardest thing is predicting direction and magnitude of the movement. If you can figure that out, then structure is pretty easy. It is pure gamma play. So you need very short dated options. Buy ATM or OTM options to capture that
Ok you are confusing me using the word volatility. If you mean you want to go in on the next bar with a directional trade using options then yes you can buy an ATM call or put and take a directional scalp and close out in whatever time frame assuming you overcome b/a spread (hopefully liquid options). As srinir said, it is a pure directional delta/gamma bet that maybe you prefer over shorting or buying the stock outright which is expensive. But yes you can swing trade intraday options on very liquid stocks and get in and out no problem. Problem is picking right direction and strike.
You can trade them as fast as you can click your mouse. But the wider the market (and it will widen with a big move -- The 85's point above), the more of the spread you will (likely) pay. If your question is *really* "How does this market work?" then nothing will beat putting up a DOM on a particular strike (or set of strikes), and just watching what happens. And realize that each strike, and for each underlying, will be its own market, so for every DOM you bring up, be thinking "YMMV."
But if we can trade options as fast as we want, then I don't understand how this strategy could fail, it does not make sense to have an strategy with 100% of success :/ Example: if I short the stock directly, I need to be on the right direction, I could even loose a lot of money if I'm wrong. WITH OPTIONS: I can use a long straddle, so I don't care if it goes up or down, I just need a strong movement, and the probability of that is near 100%. I feel I'm not seeing the whole picture, what I'm missing here? what is the risk with using long straddles for example in a situation like this (Note: options should be bought on the first 5min, and then take the profit on the next hour as much approx)