vrdiver wrote:GoSeigen wrote:In my previous post "When the yield inverts" should read "When the term structure inverts".
GS
I've been reading your posts on this thread for a while, but am still embarrassingly ignorant of what you are actually doing!
Could you point me to a primer that I could read (think Ladybird edition of "GoSeigen Straddles Mr Market")
VRD
Hi VRD. "Straddle" is jargon for an option purchase of both a put and a call option with the same strike price, usually purchased "at the money" (ATM) meaning the underlying price is close to the strike price.
The effect of buying a straddle is that you stand to profit whether the market rises significantly or falls significantly. The direction doesn't matter. You lose if, by expiration, you have not closed out your options in the money (ITM) and if the market has not moved enough to cover the purchased option premium.
Here's an explanation of straddles: https://www.theoptionsguide.com/long-straddle.aspx
I've also traded strangles: they are similar but you purchase out-of-the-money (OTM) options instead. This reduces losses from a quiet market but makes it harder to profit (larger swings needed).
I track the VIX term structure to help make decisions to either buy or write (go short of) these options. The VIX measures the implied volatility of the S&P500 index; its term structure plots the price of VIX futures vs their expiration date, similar to a bond yield curve.
This thread within a thread was started during the 2020 crash when the OP asked whether it was time to buy, and I remarked that given the extreme volatility of shares (because convexity) I preferred to try a market-neutral strategy and see how that performed, which I have been tracking ever since. It has been reasonably profitable for me, however it is only a small portion of my portfolio.
The long straddle trade is nice psychologically because you are happy to close out gains on your puts when the market has fallen and equally gains on the calls when it has risen. (So you are buying low and selling high.) Conversely, when the market is quiet you are happy to watch the premium drop on your short positions. (So you are profiting from being patient and not champing at the bit.)
GS