Longer Dated Long Straddle

[jhollett]

Hey Everyone,

I just signed up for Volatility HQ to run some data on something I've been doing on my own and the reason I came to this service.  I will use the stock KR to explain what I'm saying (by the way it also seems to be the best fit for my theory based on a quick search).

What I understand the theory of the hedged straddle to be is to set a long straddle on the lowest possible RV decliners to get the cheapest possible chance at gamma gains.  I have been trading something similar for a while now but using longer term options that have less time decay as well as less IV % bump.  Now that I've signed up for Vol HQ I can compare both options directly.

Here is a chart for the straddle RV with the first expiration after earnings as well as a chart with a long straddle with the expiration 100+ days after earnings.

The first chart with the short term options has the RV decline from 9.1% to 6.8%, thus needing a gamma move or a strong hedge to counter this decline if the stock stays put.  But the second chart with the long term options of 100+ days starts at 17.8% RV and ends in 30 days at 18.3% RV.  Is this not free exposure to gamma?

 

(NOTE: being new to Volatility HQ I could not figure out how to turn off the short strangle hedge in the Advanced Options area so they may be skewing results, but when I adjusted the short strangle % nothing changed)

 

[Yowster]

@jhollett I believe your longer dated graph appears to have rising RV because the weeks until expiration varies among each iteration, thus skewing the average line - look at the legend on the right side, the weeks to expiration varies from 30-33 (and the current blue line is 58 weeks).

 

When using much longer dated options for the long straddles, the thing to watch out for is slower growing gamma gains as the stock price moves which could hurt when the stock price moves beyond short strikes which expire much sooner.  

[jhollett]

@Yowster when I've done this I haven't hedged with a short strangle I've simply bought 30-40 days in advance and waited for some directional move without a lot of negative theta against the position.

[Yowster]

15 minutes ago, jhollett said:

@Yowster when I've done this I haven't hedged with a short strangle I've simply bought 30-40 days in advance and waited for some directional move without a lot of negative theta against the position.

Just be aware that doing this at a time of elevated market volatility exposes you to a significant RV drop should market vol return to more normal levels, and this RV drop may exceed any gamma gains due to stock price movement.   Remember that when using longer dated options, it takes less of an IV change to effect the option price.

[jhollett]

@Yowster I only have one of these trades on right now because of that.