So far all intended purposes - it appears there is a gap in my understanding of option/straddle pricing that i cant figure out on my own.
Background :Been trading stocks for a few years and im trying to transition to trading options(straddles/strangles). I\`m familiar enough with options ( or i would like to think i am ) , spend enough time supposedly watching/reading about fundamentals to know what Greeks are and how to determine risk in a position ( as time progresses , volatily drops - or a move does not occur etc ). There are 2 concepts that i cannot understand / calculate correctly on my own.
1st) Identifying Straddle Skewness ( BIAS to one side vs other ) - in some cases its apparent ( in a bull trend - it favors calls , in a bearish trend it favors puts ) - and its easier to identify - you can see either IV (or delta )on one of the PUTS/CALLS higher than the their corresponding PUT/CALL - fairly simple there. Now in other cases ( the one i struggle with ) - its undetectable - differences are 2 small to make a difference - and yet once a move actually occurs (and its to the wrong side) - you can tell. I like to give examples so everyone understands the points i\`m making correctly : TSLA - ATM straddle at 440$ ( straddle is priced at 13$) - if stock price moves up ( half a percentage) price , straddle price goes up to lets say 13.25-13.45 ( depending on the actual speed of the move ). on the contrary price goes down half a percentage - price goes down from 13 to 12.6-12.80 - and it would require additional move in order of the price to start going back up ). Now in this example price swings make a lot of difference ( as they impact the straddle) quite a bit - but same can be observed in 2-3 week DTE options in which sign insignificant move in price would not have an effect .
2nd) and this is more problematic for me than the Straddle BIAS - is the "flash drops" ( in some cases "flash jumps" in straddle prices - specifically when no move is happening or a move occurs - it is fast enough to initially inflate the price and then prices depreciate a lot (compared to the prices before the actual move happens ) . Few examples below most recent from this morning ( right before i made this post - lol ) . So playing a 440 straddle on TESLA - enter at 13$ on the volume candle this morning ( usually to limit loses i execute those trades withing 45 mins of open - most of the time i keep them even shorter 15-30 mins ). Straddle is not going anywhere - TSLA started to consolidate for the first 15 mins - which happens all the time - price retraced to about 12.6-12.8 range ( i decided to hold - agains my better judgement ) for the 45 min candle - as it appears to be working enough in my favor - as i\`m estimating the move going down to 435 or up to 445 ( in which case - i should be able to profit ). Price dips to 437.4 - and then starts to rappidly go up ( especially on the 1 minute chart) , Straddle pricing goes to 13.10 - then down to 12.8 then back to 13 - and all of the sudden it just DROPS to 12.20 - this is not in a matter of minutes - its in matter of seconds. Usually as price moves rapidly in each direction straddles should appreciate or if has BIASED to one side ( Dip) and then appreciate - but not in this case.
(copied from a different post where i discussed this - as i\`m contributing those to IV - however the dumped today in TSLA did not happen cuz IV died - prices of options/Straddles just depreciates across board )
In practice - as i observe 4 - 6 stocks options price daily LLY pricing changes on minute intervals from 28$ to 25$ and back on open with limited move in price. Now personally i\`ve attributed that in change in IV - as i can see it go down quite a bit and then right back up - as the candles are trying to move in a direction. Based on my understanding Vega and IV are proportionally correlated - so a change in one would result in change in the other. Am i contributing the seesaw of price increase-decrease to the wrong attribute then ? In other instances where IV dipped below 30 on open i\`ve entered and exited ( 18$ to 22$ - i dont have exact numbers in hand but about that ) in a matter of seconds , in this case the price is not even moving enough to cause that as a change - only big number changing is IV. I exit right away - as based on my previous interactions this price will not hold if the stock does not do a move ( and in a lot of cases is just an IV gap that causes the price to move ). \*Ive played 2 week to expiration using this aswell - as further from expiration options are - higher price changers would occur when IV goes up. In those cases stock might not be doing a move ( or a very insignificant move ) and i\`ll try to catch an IV dump and exit on the increase.
On Friday at 9.02 there was an IV dump across stocks - i had positions in Tesla and META that i was a little ahead - that turned into losses immediately ( META went from 6.7 to 5.2$ in a matter of seconds) - this was not a price move - volatility just shifted rapidly and never went back up. TBH i dont know how to "guard" against those properly . Only though on how to do so moving forward was to get an "average" daily IV (different time ranges where it applies ) and try to determine low - high ranges and include them in my exiting decisions . Another example for this would be christmass/holiday weeks - where stocks open with "normal" ( slightly below average IV) and then they dip... HARD. Tesla went to 36% IV that week i believe it open in Mid 40\`s (dont have the actual data ) - i got stuck in 1 of the sweeps and when i saw it dipping below 40IV exited.
Screenshot below where i circled the candle where it all "dumped" and price fell from 13$ to 12.30 this morning ( again price spiked from 12.8 to 13.10 and just dumped in 2-5 seconds back to 12.30$ - in which the stock did not move )
https://preview.redd.it/hm3eu54u9cdg1.png?width=1228&format=png&auto=webp&s=4427a8ce503f0fd98a0a1f2bf46c554cd000c346