Straddles, are they ever profitable?

Discussion in 'Options' started by TradeCat, Jun 28, 2016.

  1. Sakti

    Sakti

    Besides a large move in the underlying, another way to profit from buying straddles is to gamma scalp afaik. For this you need an oscillating underlying with large enough magnitude (for lack of a better word).
    Is there a graph or a metric that measures the level of oscillation? I have only been inspecting the realized volatility and the graphs manually.
    Also is there any 'sweet spot' for the delta at which the hedge should be made? I'm assuming this highly depends on how many DTE and the underlying price and so on.
    Are there any recommendations on good volatile Asian underlying for gamma scalping? As I'm based in Australia, trading US options will be a bit problematic for me.
     
    Last edited: Jun 29, 2016
    #11     Jun 29, 2016
  2. Wes2000

    Wes2000

    Gamma scalping is more or less a defensive measure to fight the time decay on a long straddle. Determining the 'sweet spot' for when to scalp is key. The best way to determine the sweet spot is to backtest the strategies using different parameters. For instance, you can backtest what happens when you scalp a X delta, Y delta, Z delta, etc.
     
    #12     Jun 29, 2016
  3. sle

    sle

    -- gamma scalping is also known as hedging your delta :) it's coincidental that the structure (straddle) starts out delta-flat(ish), otherwise you'd be trading delta against it at the inception of the trade
    -- there is nothing "defensive" about delta-hedging - it's a way to transform your risk from exposure to terminal distribution to exposure to realized volatility
    -- all of the major Asian indices have high amount of structured product issuance, so the there are fair number of interesting things to do there (KOSPI and NKY are my bread and butter)
    -- as a retail trader (unless you have portfolio margin) your capital efficiency as a delta hedger will be dismal, since you will be posting high margin for the stock
    -- how delta hedge really depends on your risk preference - you can re-balance the book based on delta threshold, time threshold or a combination of the two. There are arguments for either
    -- another parameter that most people ignore when hedging delta is what vol to use for hedging as it will determine your relationship with the underlying (e.g. in case of straddles if you hoping for mean reversion, you want to hedge at lower IV, while if you are hoping for a trend you want to hedge at higher IV)
     
    #13     Jun 29, 2016
    Sakti and nbbo like this.
  4. Jones75

    Jones75

    IMO… I find long synthetic straddles is the best way to manage risk. Plus, you're only fighting the greeks from one side. They're good for swings and volatile (moderately high HV) ER's. Biggest drawback, cost more to play.
     
    #14     Jun 29, 2016
  5. only when I do them... :)
     
    #15     Jun 29, 2016
  6. sle

    sle

    Sorry, being thick here. Assuming equal amount of vega, how does synthetic straddle differs from a regular one from risk-management perspective?
     
    #16     Jun 29, 2016
  7. newwurldmn

    newwurldmn

    Only benefit I can think of would be deal with shorting stock.
     
    #17     Jun 29, 2016
  8. Jones75

    Jones75

    On one side of the long straddle, you don't have theta or any of the greeks to contend with. Every 100 shares of stock is worth 100 deltas. It's a delta neutral set up, with lots of possibilities for adjustments.
    Even if your stock fell to $0.00, the delta neutral puts that were purchased at the same time would have you swinging from the chandeliers for joy.
     
    #18     Jun 29, 2016
  9. donnap

    donnap

    Generally, the synthetic ATM straddle will be 1/2 size of a straddle using two .5 delta options instead of the UL.

    Long 200s, long four .5 delta puts is equivalent to +2C, +2P ATM straddle.

    This is a generality, as there are exceptions.
     
    #19     Jun 29, 2016
  10. So you are saying that if you buy a regular straddle and stock goes to $0.00 you don't make money but if it goes to $0.00 on a synthetic straddle you make a killing?
     
    #20     Jun 29, 2016