Hello, I want to place a Straddle spread on SPY this week, but I'm not sure which month to trade. I want to trade ATM options. I don't think we'll have drastic moves this week - since its a short week. Would I Jan or March options? I know volatility would have to do with this, but I"m not totally upto speed on volatitlity. Any help is appreciated. Thanks! -Daytrader85
this is a volatility strategy... so you should be very up to speed on this IMO. if you're long a straddle, you're expecting an increase in vol if you're short, you're expecting a decrease or for it to stay the same worst case. which month and strikes will all depend on what your opinion on vol will be...
You're basically predicting that a big move will occur some time in the future and it's going to be significant enough to overwhelm your initial debit. The number of months out you go in expiry month should reflect when you expect the big move. This sort of thing is usually done on individual stocks rather than ETFs because they're more prone to sudden large moves. This is usually due to earnings announcements, drug trial results, etc. SPY's movements are rather dampened because it's made up of 500 stocks. You definitely need to get up to speed on volatility. It's what options are all about.
Three factors will affect a straddle: underlying movement, IV change and time decay. Price movement is likely to be the number one factor unless the underlying trades sideways. Then IV contraction and time decay will get you (assuming you're long). Near term options have higher delta so they're better if your move is sooner. Time decay is greatest in the last month so if the move is later, far term options are better. It's a trade off so pick your poison
BTW I hate straddles since you have both theta and vega working against you. I much prefer trades where I'm selling some premium.