QUESTION:
What are the odds of long straddle that it would work on Nov 4th day after the US election assuming nifty will swing 3-4% either way if i initiate the trade on Nov 3rd.
Lets assume Nifty spot on Nov 3rd is 12000
if i initiate a long straddle at 12000(weekly options) strike considering that on Nov 4th either PE or CE will be deep in the money P/L will be huge no matter if other strike expire worthless i will still be in profit.
but here is the catch lets say nifty open at 11600 on Nov 4th then technically my PE is now in the money 600 points if i substract the premium paid 200 for both CE and PE assuming 100 premium each for PE and CE i will still be making 400 points so all and all its a high success probability trade if it is so then everybody will be doing this and if it is so then everyone will make money and if it is so then who the hell is loosing .
If i choose to square off my PE at 11600 its no brainer that nobody will buy this overvalued strike which cost 600-700 and if this is so then how would market be moving
this is where you have mistaken ,
ahead of a big event and if market participants are a huge swing , options will not be priced so cheaply . The premiums will be huge .
Once the event is over , Vix will drop considerably there by reducing the option movement and there could be changes you might lose on both sides .
If there is a wild and big movement on one side , then yes definitely you will be making some money .
First of all the long straddle is executed when the volatility (IV) is very low and expected to increase in volatility during the holding period, so that the buying premiums are low and selling premiums are high. And once the event will happen the IV will decrease as the results will be known.
In long straddle you will be profitable in either way untill it is beyond the break-evens. So if the nifty gap down and open at 11600 then you will be profitable but the one who sell the puts will be in loss… Its a zero sum game… If you are making money its means some one is losing it.
You have to sell it at that moment at the market price when volatility is high… Because if you wait and the event results was out then volatility will decrease which leads to decrease in the premium…
This is my understanding… I always preffered corrections…
i have did this two - three times, recently when moratorium case result was expected.
if you implement this on or day before result, premium will be already high, which will harm you more if the big movement isn’t of that greater which can cover your combined premium you paid.
if we work with Nov series weekly options then first week will be expiring on Nov 5th we can initiate the trade for the same expiry on Nov 3rd around 3:20 PM exactly on the US election day since we are 9:30 hours ahead of the US time talking about the premium there will be only 2 days left for that expiry so most of the theta will have eroded till 3rd Nov and taking Vega into consideration since volatility will be higher around such events the premium for ATM strike would be 80-100 as far as i know it may vary.
and you will get an idea who is winning on Nov 4th itself with exit polls and news channels there is no need to wait till the result is out officially.
The question is how market will react if trump wins and how if joe Biden.
Sir this event is far more significant than any events you can see the chart how market had reacted Nifty itself swing 4-5 % up or down just day after the elections check the candle for 5 Nov 2008, 7 nov 20012, and 9 nov 2016
Volatility will be priced into options and for sure options will be priced heavily going into this event.
Also this time I think results may take 4 to 5 days as there are going to have some changes in the way counting which normally happens due to covid, so may be can you check on this one first, I am not sure though but remember reading it somewhere.
