Extrapolating Straddle Prices
The following Question was asked so I thought I would share a video that explains it in a little more detail. Here is the asked question:
I'm fairly new to options, but I've read some books and have the basics down. I was chatting with a professional options trader, and he mentioned wanting to examine certain events and extrapolate straddle prices. What is meant by this, and why is the focus on straddle prices? Nothing I have read emphasizes the need to examine straddle prices, but I have heard other traders talk about this before too. I'm not a trader (yet!) and I was hoping to have this clarified.
Here was the first answer that was provided and I agree with it, I just thought I would contribute more in a visual way.
Some argue that straddle prices effectively indicate the expected move of an underlying for a binary event. The belief is that by examining the ATM call and put, the total pricing associated with both can be applied to each side of a stock's price to create an expected range. Most agree this number is rough and there are of course various schools of thought who believe it can be further perfected.
ToS for example uses their “Market Maker Move” which is quite simply the ATM straddle + the 1st OTM strangle divided by 2.
TT advocates 85% of the ATM straddle. I'm going to assume this is what your friend was referring to.
Here is a video of training that I taught that explains this concept. The stock being presented in this example is MasterCard (MA).
The Extrapolating Straddle Prices discussion begins around 6:10 and ends around 14:50
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