Please explain Sticky Strike Strategy.
This involves volatility curves/skew. As the underlying moves, you assume that the shape of the curve stays the same; however, do the IV points on the curve align with strike or delta? This is a pretty advanced topic especially given the relative flatness in many NSE vol curves. What specifically are you interested in?
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In one of the Master Class Dr Chirag Shah explained “Sticky Strike Strategy” but I failed to grasp it.
Still I am not confident to use the strategy for Option Buying. It would be helpful if you can explain with an example.
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Very interesting…I didn’t realize that this concept was being discussed in the Master Class. Here is an example that hopefully clarifies things a bit. Let’s say that underlying ABC is trading at 100. You also have the following strikes (with IVs and deltas):
95 (ITM): IV = 13%, Delta = 0.60
100 (ATM): IV = 10%, Delta = 0.50
105 (OTM): IV = 12%, Delta = 0.48
110 (OTM): IV = 13%, Delta = 0.40
Let’s say that the underlying moves up to 105. The concept of ‘sticky strike’ for volatility skew would say that the vol curve would shift along the strike. So, the 13% - 10% - 12% IV curve for 95-100-105 would shift to the 100-105-110 strikes. Since volatility is a function of buying and selling pressure, this could possibly be an indicator of option mispricing at a particular strike. I’m going to tag @Dr.ChiragShah because I want to make sure that I’m not referring to something different than he was in the course.
In sticky strike strategy , Buy weekly ATM call option of Nifty , if market is expired above strike price then close ITM option and buy same strike ITM option (Stick with strike) of next week on expiry day ,
If market expired below your strike price then again buy ATM call option of next week.