You have to be very careful of this strategy. Implied Vol must be considered. As Dan pointed out, these types of trades work better when coming out of a squeeze, but only because typically IV is lower during those times. Compare the IV for front month and 2 month options and you will see what the market is building in. Usually “big moves” are already anticipated in the market and priced in via vol. The best win will be when NO ONE expects a big move except you 🙂
The temptation that should be avoided is to buy straddles in the anticipation of big events, such as earnings, or an FDA release, or a FED speech etc. During those times, right before those events, IV is much higher because the market is anticipating a big move already, hence the option price is inflated. Then you have a big move but after that big move is over, the volatility component of the options price will drain out like air rushing out of a balloon. You’ll get your big move, but you will end up losing money on the trade as the decrease in option value due to now lower vol will overcome the gain made by the big move. This happened to me on GOOG earnings once when i was very much a noob to straddles and strangles. So please make sure you consider IV and compare the IV of the front month v. next month, etc. Respect Vol on straddles 🙂
You have to be very careful of this strategy. Implied Vol must be considered. As Dan pointed out, these types of trades work better when coming out of a squeeze, but only because typically IV is lower during those times. Compare the IV for front month and 2 month options and you will see what the market is building in. Usually “big moves” are already anticipated in the market and priced in via vol. The best win will be when NO ONE expects a big move except you 🙂
The temptation that should be avoided is to buy straddles in the anticipation of big events, such as earnings, or an FDA release, or a FED speech etc. During those times, right before those events, IV is much higher because the market is anticipating a big move already, hence the option price is inflated. Then you have a big move but after that big move is over, the volatility component of the options price will drain out like air rushing out of a balloon. You’ll get your big move, but you will end up losing money on the trade as the decrease in option value due to now lower vol will overcome the gain made by the big move. This happened to me on GOOG earnings once when i was very much a noob to straddles and strangles. So please make sure you consider IV and compare the IV of the front month v. next month, etc. Respect Vol on straddles 🙂