Well, there are all types of traders and to each his own, I don’t quite get why so many traders trade intraday straddles/strangles ? After leverage is gone, simple spreads (which are hedged) can give far higher returns due to reduced hedged position margin benefits, then why would someone trade intraday ?
For example, even if one does a far otm bear call spread, and one manages to get 10rs, the outcome is 750Rs on a 25k investment, that is still 3% a week.
I am not saying its easy money and one can make consistently only if one has good skills, my questions is why the risk of trading intraday when hedged margin benefits are there ? To initiate straddles/strangles, one would require 3 lakh Rs after leverage is gone.
If you put SL for straddle/strangle then there is no undefined risk .
After intraday leverage completely goes , we cash take advantage of margin benefits
Bhai that was an observation, if u look at twitter, most of the traders (who are active on twitter) trade strangles/straddles. I am not saying based on any data, it is my observation. I maybe wrong too, but every other handle posts about m2m straddles/strangles almost on a daily basis. It is common knowledge that straddles/strangles have become too common and a lot of retailers are doing it. They seem to be popular.
But isn’t intraday theta decay overrated in volatile times ? Actual theta decay tends to happen overnight, I mean risk : reward would be far better for overnight spreads right along with peace of mind ?
But if lot of retail traders are doing it. Does that mean they are making money or losing money consistently?
Another wild assumption i making is generally institutions don’t like to lose or lose less than say the retails. So is it possible that retail could actually be losing money consistently.
All i m saying is think this through, if it was that easy for retail , will institutions just sit around losing money consistently.
Another reason i say that is generally its the institutions who are the option writers and there is more risk in option writing then buying. so for that risk will institution be expected to make better returns. Retail on the other hand will more on the buying side and his risk is less or limited as compared to option writers and hence his returns as well.
So considering these facts and common assumptions , which side is making money consistently?
This is a wrong notion. If that was the case, then everyone would sell options just before markets closed and hence IV would dramatically go down as market closes. But that isn’t the case. Observe the price movement of a slightly out of money option on expiry day and then you’ll realize time decay at work. Time decay becomes faster as expiry nears, On expiry day, even within an hour time decay is very readily noticeable, given the underlying remains relatively stable. Try it and see.
As for straddles/strangles. It’s mostly about spreading your risk. Instead of putting all your eggs in one basket, some prefer to have two baskets. If you are betting on two directions, you know at least one will be correct. And although you are taking bet on both directions, your breakeven points at expiry are much wider on each direction. Whereas, if you trade spreads, your breakeven point won’t be as wide and if the underlying moves against you have to take a loss and exit. Its all about your expectations on the underlying and how sure you are of your view. It’s all about style/preference. Personally, I like to place bet on a single direction at a given time. Makes the position simpler to manage. Also probably because I am more confident about my view. Sometimes I also look for “arbitrage” spreads by selling an option with high IV and buying one with a low IV and square it off once it reverts back. I think spreads are fundamental. Straddles/strangles are essentially combination of two spreads.