Update, ignore the arrow and hrzntl lines, as just something I was showing to someone on the 1 min bar chart. T-2 and counting J_S
Below is a SPY Jan 20, 2017 215.00 ATM straddle (long or short) example that we can watch as it progresses. SPY at $214.92 Jan 20, 2017 215.00 call (bid $7.78 ask $7.87 last sale $7.80) Jan 20, 2017 215.00 put (bid $9.40 ask $9.50 last sale $9.45) SPY Jan 20, 2017 215.00 ATM long or short straddle $17.45 (based on last sale) The MM's expect the SPY to trade from about $197.55 TO about $232.45 until Jan 20, 2017. The MM's expect the SPY to close at about $197.55 OR about $232.45 on Jan 20, 2017. During the next 6 months both the long and short ATM straddles will ebb and flow until expiry in which they most likely will expire at break-even. The same applies to any equity/etf ATM straddle, GOOGL, GLD AAPL, FB, TSLA, etc. There will be some exceptions but the ATM long and short straddles are priced to break-even from the get-go.
I have confidence in the MM's to efficiently price the options. Best case scenario for the MM's is for both the long and short ATM straddles to break-even. There will always be exceptions but over time the ATM straddles will break-even, making them not worth to trade. EDIT: Commissions and the bid/ask spread would be additional costs for the retail trader.
I am waiting for TWS to load the chart In the meantime, have you any additional little "snippets" you want to share, as I am interested, no matter where the market goes J_S
They are useful for certain situations, like you think the market will move violently, but not sure which way. Sometimes both, then you can leg out. Or you expect a range to hold after a high volatility period, then you can sell it expecting a vol contraction. There again you can leg out or adjust the center strike. But if you are selling premium you have to know the tail risk. In these examples it has to be 5 percent or so, just guessing. That may not seem like a lot until chaos breaks out
I feel like I'm missing something here. Is it me or is this Obvious City and I just showed up? Isn't this just bell curve analysis? A certain percentage of the trading over this time period will fall within the range based on current vol, interest rates, etc. Isn't that just black scholes and other option theory?