I can empathize with any new options trader trying to figure this out. Here are some points to help: - Keep in mind that the option premium anticipates the future price movement of the tradeable (stock or ETF). That means the call option premium will be about as much as the price of the tradeable is expected to move up. If the option is priced below the historical price movement (IV< HV), that just means the tradeable price is expected to move less in the future. A low IV/HV ratio does <b>not</b> mean that the option is a bargain. - Since you are trading a straddle for which you pay both sides (call and put), the price movement of the tradeable must overcome about twice the expected move implied by the option premium. This happens sometimes, but not most of the time. On average, you will have a net loss if you place this trade many times (assuming you hold to expiration). - Generally, the option premiums on indexes is higher than individual stocks due to the convenience of indexes and higher demand. And price movement tends to be less for indexes than individual stocks because the net index movement is moderated by the average of its components. Taken together, these two points make the purchase of straddles on indexes a poor choice. You would be better off buying straddles on individual stocks which have lower premiums and a greater potential for larger price movement. - You referenced a study showing that a straddle strategy can be successful with an exit when the loss reaches 10%. The risk here is that a string of consecutive losses will deplete your account quickly. - You are using technical analysis to identify an inflection point to time your trade. That's a reasonable approach, but timing indicators are not consistently reliable. If you really had a good indicator for picking tops, I would say to just buy puts (not the straddle) and you would have a fair chance. But again, the notion of timing the market consistently is a beginners folly. - You're probably not going to believe the negative nature of my comments above. You will likely press forward until you convince yourself. That is OK. Just trade very, very small positions until you reach your own conclusions. If you find consistency in success, you can always scale up later. If you find it doesn't work out as you hoped, you still have most of your account left.
Wow! That was a meaty and full mouthful to digest. Makes me think, but then what to do? What are the alternatives? I´m looking to make one or two trades a week, that could be profitable on a regular basis.
Eduamon Thanks for that old man. Will try to read them later today. But I got a real chuckle out of it. You are the man! Gave me a boost, just before the market is getting ready to open.
Well interesting development. The Volatility is dropping and I just took another Strangle based on the QQQ index moving up. Now I´m holding two Long Straddles and one Long Strangle. None of them are making any money, despite the index moving up and the acquisition of them being in a rollover type mode at specified intervals. I was supposed to be able to sell the oldest one, but it didn´t work out that way. They are ALL losing money. Plus I think the third STRANGLE ended up being over my amount of account money available. This is paper trading so I can get away with it, but still in real life I would not have been able to put on three straddles. I need to contemplate this for a bit and see what if anything should be done about it? There is a lesson here, but darned if I can see it yet?
Index options volatility has a pervasive tendency to drop as the market rallies and rise as the market drops. This is one thing working against you. There may be more.
Well 2 nd, or 3rd month options seem okay to trade Long Straddles. But for the heck of it, I just did the IV calculations and a big drop in IV plus also in the premiums. Then I decided I would look up a VIX chart. Got VIX-X. Which seems right on. It is dropping very rapidly. So it seems the IV, or VIX chart direction effect on premium value of the Long Straddle is STRONGER than the upward movement of the index, in this case the QQQ. Which makes me wonder, what the devil do you trade then? IV or VIX apparently in a Long Straddle situation. I would think though since the Long Straddle is Delta neutral, that even if the market index was BEAR, with a dropping VIX you would still be losing on your Long Straddle premiums. How do you trade this? I would hazard a guess you cannot trade a Long Straddle on a dropping VIX? Which would eliminate the rollover method of Long Straddles. Lesson learned here? What kind of lesson is it? I presume this would also eliminate this week, the WEEKLY Thursday to Friday long straddle trade? I was planning to buy a Long Straddle on the Weekly as per Forex Forex, but doesn´´t seem to be a good idea as I would do so in CASH. Money I cannot afford to lose.
Please correct me if I am wrong. It appears when buying straight PUTS or CALLS in a trend play, that one should first check the VIX-X chart and see what it is doing. Or a Long straddle/strangle for that matter. I think I just made a new rule. It is not enough to have the index move in the direction you want in a trend, but if the IV, or VIX is not either stationary, or moving upward, you should miss the trade?