can you give an example of conditions of volatility favorable for straddles? Are event days (gdp/ inflation/rbi) good bets?
Straddle positions are best to enter when the Implied Volatility is at lower levels. Lower levels means Implied Volatility is lower than the Historical Volatility readings for that particular scrip.
Volatility for every scrip will differ. For a share which is volatile enough and historical values of Volatility are around 45-50 a higher number of IV [eg. IV 47 ] will be ok and a stock which is low volatile whose Historical Volatility remains at around 22-25 this same number of 47 will be huge.
Just a day before the earnings announcement day [April 12th] of INFY the IV of ATM CE & PE was around 70 . So this IV was greater than the Historical Values of Volatility for INFY . This means that the premiums were very high. If suppose now at this point somebody takes a Straddle position then he is paying more money to acquire this postion. If the result announced is in line of the estimates then the share might just move a little in either direction and so the Implied Volatility will come down drastically after the result announcement. This will incur hefty loss to the straddle position as the IV has come down so does the value of the premium.
So taking straddle just before the Earnings Announcement or RBI report or any such mega event can go against the trader if the reaction after the announcement is not so sharp that the position crosses the BEP [Break Even Point]. Taking Straddle position well before the event when the IV is in the lower range [compared to Historical Volatility] can though be profitable as the Premium value will increase till the day before the event as the IV till that time will probably increase due to anxiety of the market participants.
A drastic move though after the event can be really profitable as the stock might move so much that the BEP is crossed and the total position is now in profit. So a probability of move has also lot of importance in a straddle position.