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Long Straddles: Is There Ever an Opportunity? - Jul 11, 2016 | Market Measures
We can't always be short premium, can we? Tom and Tony discuss the results of our study testing a strategy of buying Straddles in very low Implied Volatility environments.
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      Market Measures

      Long Straddles: Is There Ever an Opportunity?

      | Jul 11, 2016
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      Market Measures

      Long Straddles: Is There Ever an Opportunity?

      Jul 11, 2016

      We like high Implied Volatility (IV) environments because our experience and studies tells us that selling option premium in such situations gives us an edge. This is because IV usually overstates the expected move providing an edge in Theta (time decay) to premium sellers, especially in such undefined risk strategies such as Straddles and Strangles. We avoid these strategies when IV is low and also when IV Rank (IVR) is low. Since we aren’t selling premium perhaps we should do the opposite and buy premium. Some other sources suggest that this works. Does a strategy of buying Straddles in very low IV and IVR situations prove profitable?

      A long Straddle will be hurt by Theta and benefits from a movement in the underlying and an increase in IV. Our study was conducted in the SPY (S&P 500 ETF) from 2005 to the present. We bought the at-the-money (ATM) Straddles. We tested for situations in which the IVR was under 10 and under 5, the best case scenarios. We also tested for managing winners at 25%, 50% and 100% of debit paid.

      A results table of long SPY Straddles when IVR was below 10 was displayed. The table included the average debit, success rate, average days in the trade, average P/L and max win. Despite managing winners the average P/L on all the Straddles was negative. A second table had even worse results on buying Straddles when IVR was below 5. Tom and Tony noted, “No matter what anyone tells you, you can’t inventory long volatility. Nothing is inherently cheap.”

      Watch this segment of Market Measures with Tom Sosnoff and Tony Battista for the valuable takeaways and the results of our study testing a strategy of buying Straddles in very low Implied Volatility environments.

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