Is anybody here taking advantage of large overnight gaps to trade volatility, etc? How efficiently priced are options under these circumstances? Is a true edge to be gained here?
Options are not priced for gaps. The trick is entry *, because you don't know when a gap will occur. * I'm referring to buying options - calls or puts - not selling.
Then you are back to square one. I have noticed some stocks continue in the direction of the gap, others trade flat or reverse. It's hard to buy an option that's 200%+ more than a day before, you could ask your same question in the Psychology forums.
I try to do it before (in real money account), it is not working in real world. In practical you don't know it will gap up or gap down, so the only way is to straddle it, but one leg up will cancel the other one that go down. Always, options get a bit expensive before market close and this make the strategy even harder to profit, I think MM would like to protect themselves for any unforseen big gap. Obviously, it is a different story if you have any insider information that you know that particulat stock wil go up or go down, but this is illegal for retail traders
No - the legs don't cancel each other out. Gaps WILL produce gains of well over 200% on either the ATM/OTM * puts or calls. * 1 or 2 strikes OTM.
you are talking about big big gap, it won't happen that frequent. It is more like buyinh lottery ticket, you loss money each time (theta decay in long straddle ) and you hope one day you will hit your lottery ticket with big gap