In fact, hedging short straddles/strangles involves locking in losses te prevent further mishap. This makes it very frustrating for many ppl, since a previous temporary theta-profit is now not inly given back, but locked in as well. Straddles have diminishing gamma moving from the center-strike. This is not the case with strangles approaching expiration, which makes it harder to manage. Ursa..
He Was Long 61000 Nikkei 225 futures and short 28000 JGB futures with approx 35,000 Nikkei 225 straddles. He also was short 6845 Euroyen futures
Whether or not selling option in this way is viable depends on many factors, including the hedging and risk management strategy of the trader in question. There are many hedge funds and CTAs that trade in this way, all with differing degrees of success or failure. I personally trade in this way and, for whatever it is worth (read: nothing), I am profitable to date.
There is a stunning dis proportion in HV/IV ratio lately( equities)...never saw anything like this before...Good opportunities in naked shorting or long calendars for less aggressive traders.
I'm not sure I understand this one. naked short = short vega long calendar = long vega looks like you would be trading IV in opposite directions. Am I missing something here? .
Average vols on the 1000 most liquid US stocks are at 40 while their 10d HV is at 24...This is the highest IV/HV ratio I ever saw ; definetly not your "usual" 200bp ask/bid spread diff (to lock in a fairval) Just facts.
I suggest you gain a rudimentary understanding of odds before making a remark like this. Of course if you're correct and the odds offered are always terrible, you should be able to make a tidy fortune buying straddles off me and the other short gamma traders here into perpetuity. Best of luck to you.
yes , some of the bp diff is report's related , although I ran average on Apr exp , which have only 20% of reporting stocks. I think ( saw it before) its mostly due to the whacky HV calcs where one or two volatile days ( like 2/28) heavily weighting on HV's selected time period and redaction in IV is lagging .
in theory, selling atm straddles poses no advantages or disadvantages over buying atm straddles. in practice the seller benefits, as long as he/she covers themselves (in various ways) and or plays by strict trading rules (example avoid certain highly volatile stocks, or close position after gain of x% or after y days). The reason is that atm front month straddles are almost always over priced relative to back month straddles and relative to otm strangles. If you want to test this theory, I suggest: record the atm straddle price, for the straddle expiring next month, on the first of each month for a year, on each of the dow 30 stocks. example on january record the cost of the february straddle for each of the dow 30 stocks. next record the value of that straddle on expiration friday for each of the dow 30 stocks. repeat the experiment twelve times. I'm confident the straddle seller comes out way ahead......and the strangle seller even more so.....