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Market MeasuresBuying Best-Case, Short-Term Straddles | Aug 10, 2016
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    Market MeasuresBuying Best-Case, Short-Term StraddlesAug 10, 2016

    Gamma risk is greatest when holding short at-the-money options that are near to expiration. This is part of the reason why we manage our short straddle and strangle positions early for a profit when we can. However, what might the results look like if we were to flip the script and buy this larger gamma number?

    We checked out the historical results of buying straddles in the S&P 500 ETF (SPY) and the Gold ETF (GLD) with 10 and 5 days to expiration. Then these results were compared to only buying straddles when IV Rank was below 25%. The results showed a negative median P/L and a win rate that was significantly lower than the 50% that a long straddle should exhibit. Waiting for low IV Rank environments did not make the results much better, even for the more volatile GLD.

    Tom concluded that there is no significant long-run profit to be had from buying premium, even when doing so in this best-case scenario.

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