I am looking for an idea of what I should use to figure out straddle break-evens for futures options straddles. I have been using: (1/265)square root*IV*underlying price. From what I understand this is for one day of equity options trading from 9:30am to 4pm Really though I tend to buy at 8am and hold to noon. Any ideas on what numbers I should use to capture just a 4 hour window?
1) Instead of "(1/265)square root", just use 1/16 instead to simplify the calculation. 2) That calculation is called "sigma", the average daily expected range. It's more relevant to the underlying instead of the options. 3) Your straddle/strangle will be more "susceptible" to the other greek variables.
This is fine... If IV is in %, your daily breakeven is (IV*S)/sqrt(252). You can also try to incorporate various rolldown effects, but that's for another day. If you then want to scale it to 4 hours, just pro-rata it in the most obvious fashion.
Thanks for the help. I have used a pro-rated calculation but I wasn't sure if it captured the time/vol relationship correctly. So if I figure out sigma on CAD futures,which I have as 0.0080, does that mean if the greeks are constant it has 24 hours to make 0.0080, or is that calculation assuming some sort of regular trading hours. It seems intuitive that the shorter the time frame the greater the influence of the greeks, I just never thought about it until now