I'm a full week late to the discussion, but here is my contribution, the cost of the ATM straddle is not really any indication of the implied 1 sigma move from option prices. It is a popular myth that the straddle is pricing the expected move until expiration, but that is incorrect. You only need to look at any theoretical framework to discover that. For instance in BSM, the cost of a perfect straddle (exactly at the money) with interest rates and dividends set to zero is: Cost Straddle = 2*ATM*[F(sigma*sqrt(t)/2)-F(-sigma*sqrt(t)/2)] sigma = implied volatility of ATM puts and calls F(x) = Gaussian cumulative distribution function ATM= the value of the at the money strike (which is also the value of the underlying at the same moment). t = time to expiration. As you can see the cost of the straddle is not providing anything useful right away. Although it could be used to extract the implied volatility of the atm calls and puts (solving for sigma) in the world where dividends and interests rates are zero but I'm not sure how useful that could be.
I for one, do not regret OG's very helpful thread I take the points by BP, but I have already seen some advantage in using the data as OG put forward - not to try and predict where the market will finish btw! It is another simple tool to add to your trading tool box, and as always, the simplest tools are always the best ones - we will always use a screwdriver for that important little job, no matter how many battery drills we have - fixing a mirror to a wall with a battery drill comes to mind! J_S
To be fair, it's only bollocks in the sense of eliding long run p&l expectation, in which case he's probably not that far wrong, and the p&l path over many trades that implies. 50:50 1:1 bets can take you very very far from flat...
Everyone has their own view - OG stated, correctly in my view, that, in the long run ATM straddles are dead money. No one said anything about trading them, just using them to see what range the MM's are expecting till expiry, or maybe more exact, the software they use - if you look at the model price, based on TWS software, then the premiums can vary a nice bit with the model price. Maybe I am as thick as 10 planks put together, but I can see value in what OG has presented, and am kicking myself in the ass for not thinking bout it in the past, when I traded index put and call options OG, have you any more "snippets" - I am going to search tonite for a good TA setup to trade options, not sure what I will find, but I know I will find something interesting, as idiots who produce electronic documents think they are safe - which is far from the truth, even from thick idiots like me searching the web J_S
Now you are saying you can predict where price will be on a certain day? I wonder if this can be used for different plans. Does this work for ATM value on any day or only on certain days?
The cost of the the ATM straddle predicts very accurately were the underlying will trade when the options expire. But there will be two quotes, a high quote and low quote. You then can base a real trade around that info. You could even enter a long or short ATM straddle if you think the options are mis-priced. Any day.
Well OG, you are not alone it seems - my search turned up a good pdf on options trading using TA, and this is a screenshot of a section. What you described has another name - it is called the "expected move", which you more or less said anyway Keep going, you are spot on, you Guru you J_S