Indeed it can only ever be know after the fact (HV that is), but that doesn't make it irrelevant. IV is EVERYTHING, absolutely EVERYTHING in trading options ! You cannot increase expectancy by buying a relative higher IV. That is exactly the case with the "Close the straddle or buy a strangle" scenario. Absolutely !
LOL! I've been trading this way a whole lot longer than 6 months... I don't know why you guys keep assuming I'm talking about some new fangled concept I've pulled out of my ass. So what if you've met hunderds of traders doing what I'm doing and they failed? How many have you met that are doing what you're doing and they failed? It goes both ways hombre. I only took issue with you guys pointing out that your way to trade is the only way to do it. You work in a building where EVERYBODY has the same mindset, so I'm not surprised that you guys refuse to consider this concept. I agree tho, real money is the only way to the truth. I know what kind of money we make, and I see a whole lot of truth in it. But you're right, debating it is useless and too easily turns into a pissing contest. I admire your knowledge of the options market, and I have no doubt you are a profitable trader. We here trade a different way, one that you guys keep telling me doesn't exist. I just thought people on this board might like to know there are other options. Pun intended. - The New Guy
If IV is increasing, the marketplace is telling you that expected move could be greater then before. You get what you pay for. The long straddle buyer wants a bigger move. You are assuming that despite the higher IV, the stock is still going to only move as much as everyone thought it would a week ago. Perhaps today some new information became transparent in the marketplace that suggested that tomorrow there could be a price gap. See, that's my point. I guess I shouldn't have used the word irrelevant. But what I am saying is that higher IV's suggest a larger move. A larger move to the long straddle owner suggests more profits. Again, we have no idea if this so called move will actually take place until after the fact. Then we can go back and say, boy, I never should have paid that higher IV on that adjustment. But what if the inverse happens. What if the IV starts to run up. I pay up for it on my adjustment and sure enough, come Monday morning, the stock gaps up 15 pts on takeover rumors. Now I look very smart for paying up for that IV and creating a positive expectancy trade.
there were some recent examples of "behaviour after earnings" from companies such as yhoo, but ebay has a lot of shares 1.3B and it could do a small move like what qcom did which may not be enough to overcome the premiums and IV cost of pre-earnings... jmo
Newguy, I think you are misunderstanding us. We are talking about retail traders here. When you say "we", I assume you are at a firm. A firm may have the resources to make this doable for you on an individual level. But for some guy sitting at home with an IB account trading Reg T, no way. We have to make a distinction here between professional traders and retail traders. Also I am not saying that the firms that attempt this stuff fail. Quite the opposite. What I, and a few others are saying, is that the amount of capital required, the amount of resources required and the work that's involved is substantial. At the end of the day, these firms are making money, but after cost, I have found that they are marginally profitable. However, large firms have a tendency to leverage this kind of operation to such an extent where on paper, the returns look quite satisfactory. But we all know what happens or what can happen when we open that bag of worms. On a side note, LTCM were masters in these types of trades. Do you know what their real return was at the end of the year on a notional basis. Less then one percentage point! All that edge, all that arbitrage, all those PHD's, all those computers, trading at practically zero cost, all that information flow, and their returns amounted to less then 1%. Of course they leveraged themselves 30 times over to create very impressive returns. But this again is my point. To the guy at home in an IB account, if, and this is a big IF, he can mimic what LTCM did, which is quite laughable, he can expect to make 1% on his money. Without the capital and leverage, you can see why many of us on this board are saying it's a no do for the retail trader. I hope I explained myself better this time around.
No, that's what I thought you were saying. I agree, it's much harder for the retail guys to do it, but I have a retail account I do it in also. Albiet, smaller returns, but also less risk than other strategies. The trades I posted were not very good examples at all, but you can see my dilema... how can I post trades to show you what I mean without posting in a public forum what we are as a firm doing? I understand about LTCM, and how they made their money. There are ideas similar to that that retail guys still can do, IMHO, which I now realize I'm never going to convince you of, so I guess it doesn't matter. For what it's worth, cuz I know it's coming... I have a retail account in markets that our firm doesn't trade in. I'll concede one other thing. I don't have any proof that this type of opportunity exists with options. That's what I'm here to determine. I strongly think it does, because it does in other areas, including stocks, but I haven't done anywhere near enough research to establish that as a fact.
One more thing, the timeframe and position size LTCM operated on was BRUTAL. How could dudes that smart be that dumb? just MHO.... - The New Guy
i bought the straddle... a push would have been if the straddle and strangle were priced at the strike interval of 2.50. straddle = 3.5 strangle = 1.5 difference 2.00...the straddle is the better expectancy.... break evens are better on the straddle because of this... i thought the earnings would have been either very good or very bad but they were even better than i had expected... got lucky on this one....