Hi all, I've figured a model to express my view predicting future volatilities. What is the most cost-effective trading strategy to play my view of volatilities? I am thinking of doing a straddle trade and I am having the following questions: (1) It seems that the spreads of options on S&P500 are huge. What are the options with small/tiny spreads? (2) Is straddle trade the most cost-effective trading strategy for playing the volatilities? Are there other trading strategies that give better performance, such as lower cost, lower risk and potentially higher return. (3) When to enter a trade and exit a trade? During the day, the underlying security keeps changing, and correspondingly my model price of the straddle keeps changing, what should be a good entry point? And what should be the length of the trade? I am thinking of probably 1 day... that's to say, I enter the trade today and exit the trade tomorrow. Since I am doing this using program trading, I need to specify a rule for entering the trade and exiting the trade. What could be a good rule? Is 1-day trade(enter today, exit tomorrow) a good one? (4) Which contract to select? Shall I select the candidate straddle based on the ATM price of the underlying, and/or based on the time-to-maturity, and/or based on the volume of the calls and puts at that current time? How to obtain the volume in the middle of the day? (5) How to take into account the impact of dividends and American style options? If I am using one day trade, will I be able to ignore these two issues completely? I am thinking of trading options on IWM, SPY, and QQQQ, are these American style or European style? It's very complicated to handle a straddle taking into account the dividend issues and American style issues. Hopefully I can ignore these issues? Any thoughts? Please shed some lights on me! Thanks!
any thoughts ? where to begin ? it seems like you have no idea at all what volatility trading is about ... vol-plays are done through delta-hedging and not for one day ... just for starters ...
Well, I have a model and I want to put it into practice... I am not doing delta-hedging. I am just doing buy-low-sell-high, and hold for 1 day. Not sure if delta-hedging is a better strategy to express my view about tomorrow's volatility( I only have short term view about future volatility)
My friend Miz: Pls. do not take it negatively. From reading your posts, I have a sense that you need to learn a lot more. I hope I am wrong and that you make a lot of money, but I thought to say my (blant) opinion. I forgive you if you hate me for what I just wrote.
I am not taking it negatively. But you have to be constructive. What's the usefulness of writing a response without any constructive info? I am asking, I need pointers, and I am reading, and I am learning day and night... that's it.
The constructive comment is that you learn more before trying live dollars. Find your edge in a way you could say I will make money because of XXX, and the reasons are YYY. The reasons should not be something like I opine that volality is low or high or whatever. It should be something quantifiable. I think you are intelligent and creative. You will find a way to pull money from the market.
Hi Miz. Here's something constructive: paper-trading. Tomorrow when the market opens check S&P quotes and pretend you did a trade. Write down the price. Then on Wednesday see what happened to the option you paper-traded on Tuesday. Doing this way will give you a more hands-on idea of how options trading works, and will give you a feel of how your model works in the real world. Good luck kiddo.
Thanks dd4nyc. But indeed I am doing paper trading, and found no clue and confused -- that's why I am asking these questions... I googled a lot but found this forum to be most helpful... That's why I asked here...
That's the problem: from what I read here it seems you have no clue at all what you are doing. You want do a volatility trade, yet you don't know how it works. You don't want to delta-hedge but that is the essence of volatility trading, this is necessary to compensate for your loss in theta if you are long volatility. Maybe I totally don't understand what you are trying to achieve. If it's something else you try to achieve you better start to make it very clear because now it doesn't make sense to other people.