Combos and butterflies(long)
riskarb
>firmly in its grip and won't let go!
> My main strategy to date has been simply selling naked OTM calls on the
>FTSE on LIFFE. Not the most refined strategy and perhaps a little too
amateur
>but pretty straight forward and so far so good. I close out if the premium
> doubles and sell front month mostly, and perhaps next month when10 days or
> less in front month. I typically let the options expire but will buy back
>if goes to a point or so.
**You may want to consider buying your premium in a bit sooner and doing
**a rollover strategy in the deferred month.
> I've constructed a set of empirical probability histograms for the
> underlying showing the maximum intr-period increase inthe underlying over
> 35, 30, 25, 20 ... 10 days and use this to pick a strike at around 70 -80%
> probability. Because its a directional strategy I also wait for a couple
>of up days and look to sell above resistance as well. Not exactly a
science.
> I also keep an eye on volatility and will use ATM IV to calculate the 1.5
> SD strike as part of the above "guesstimation" process. I select a strike
> based on the above factors.
**Beautiful, the ATM straddle vol will give you a handle on how much
**negative edge is in the calls.
>I'm aware that I'm selling negative call skew and that this is not ideal.
>I wondering whether I should maybe go with credit spreads instead on the
>call and put side and this has led me to close analysis of your approach
with
> butterflies/condors.
**Refer to the above! The credit spreads will negate your skew disadvantage
**to a degree. Butterflies are a fantastic equalizer, plus you can trade
**directional(delta) butterflies dependent on strike selection. ATM
**butterflies are somewhat cheaper than neutral buttlerflies.
> I'm trying to understand when you add the long combo to the short
> straddle/strangle - you said that you do so when the spread is at 1/2 of
> where it is currently trading. This confuses me.
**Bad explanation on my part. I sell the combo and watch the market
**in the completed butterfly. If I sell the 1300 straddle I'll keep an
**eye on the 1250/1300/1350 butterfly. If the butterfly is trading for
**20.00 I will convert when the straddle and strangle decays enough
**to allow a 10.00 net debit on the complete butter.
> I gather that you select the long strikes based on gamma/delta
> considerations?
**Greek exposore/risks are small, excluding theta. Herein lies
**the inherent edge in long butterflies. The downside is the small
**(-gamma). I simply look at the $ r/r for various "widths", the wider the
**better(obviously). Delta plays the predominant role, but only in whether
**I will trade the butterlfy or offset the short premium.
> Do you go long on both sides at the same time or leg in over time as the
> market moves?
**Always as a combo, as I typically have significant edge in the short
**premium. It doesn't pay to trade direction as part of the process.
> What months do you sell? Front only? How long do you let your short combo
> remain naked? Do you ever put the whole butterfly/condor on at the same
>time or only leg in?
**Always the front month(or 2). We let the straddle ride for as long as a
**week. I trade a significant amount of "net" butterflies, all inclusive. I
trade
**25% of my portfolio as net butterflies. I trade the new month on the
expiration
**Friday of the expiring contract. Often I trade directional delta,
depending
**on the discount to the neutral butterfly. The neutral butter is always the
**highest debit. If I can buy a butter that satisfies my market outlook at
**a significantly cheaper debit, I will.
> Must be a little nerve raking holding naked puts on stock indexes at times
> like this....
**The puts are not considered naked with simultaneous short calls. I realize
**that the risk is unlimited(lognormally-limited, but only theoretically),
but
**I NEVER sell long delta. I always remain short the put-dominated(+skew)
**strike. So I always remain short delta. I will explain vega drift when I
have more
**time, but when you sell +skew(short delta as well) and the puts become ITM
the
**vol of the straddle can actually decrease with a selloff in the index.
This
**is a result of the straddle being long delta and call dominated(in vol
terms).
> So many questions!!!!
> I realise you've probably got better things to do than answer my naive
> queries but I am genuinely curious and simply have to know these things!!
> And don't worry that I'm running straight out and putting these sorts of
> positions on in a state of semi-ignorance - this is very much research
>only at this stage of the game.
>
> Many thanks
Richard
So what factors would you take into account in deciding whether to offset
or to convert a short combo? Is it simply a question of how far the
premium has decreased since you put the short combo on?
Indeed, what factors would you consider in deciding whether to initially
go with a short strangle rather than a straddle?
Regards
Richard
riskarb
I will tend to offset the combo if the wings(strangle) are trading
at a higher aggregate vol than is projected. If the skew is lower
than I had expected I will convert.
I normally prefer to sell a straddle due to a somewhat lower gamma
risk, as well as a greater absolute theta gain. I trade strangles when
the OTM skew is high.
arb.
Richard <richa...@ozemail.com.au> wrote in message
news:richard999-26...@slsdn36p38.ozemail.com.au...
riskarb
gamma risk is a short strangle. The gamma risk is
offset by the corresponding positive theta, but only
to a point. Only about 1/2 of the gamma risk is offset by
the theta gain.
On a positive note, both the short straddle(body)
and the long strangle(wings) are decaying with the
passage of time. Invariably, the longer the short can
be held, the lower the debit that can be achieved.
Adjusting is more art than science, and should be done
with futures whenever possible, as to avoid incurring
negative edge with each adjustment. As a rule of thumb,
I would only hedge at a minimum delta of 50 per contract,
and not to neutrality to limit the losses due to whipsaws.
arb.
Richard <richa...@ozemail.com.au> wrote in message
news:richard999-30...@slsdn43p09.ozemail.com.au...
> <ris...@ameritech.net> wrote:
>
>
> > I will tend to offset the combo if the wings(strangle) are trading
> > at a higher aggregate vol than is projected. If the skew is lower
> > than I had expected I will convert.
>
>
> What if your gamma risk increases soon after writing the combo? Do you
> adjust the short legs before adding long wings?
>
>
> Richard
Richard
riskarb
a contract that is highly-correlated.
The option markets would reflect any premium/discount
in the futures, so in that scenario, futures <or> options hedging
is a wash.
If you are trading options w/o an tradable underlying, or w/o a
suitable surrogate, you will need to hedge in the options.
A synthetic futures position is highly liquid, although you will
undertake negative edge on bull(long call/short put) <or>
bear(long put/short call) hedge. On the positive side, you
are assured of a clean +/- 100 delta.
arb.
Richard <richa...@ozemail.com.au> wrote in message
news:richard999-31...@slsdn5p44.ozemail.com.au...
> "riskarb" <ris...@ifrance.com> wrote:
>
> > Adjusting is more art than science, and should be done
> > with futures whenever possible, as to avoid incurring
> > negative edge with each adjustment. As a rule of thumb,
> > I would only hedge at a minimum delta of 50 per contract,
> > and not to neutrality to limit the losses due to whipsaws.
>
>
> Is it possible to adjust using a futures contract which is not the
> underlying of the option in issue? eg where options on a stock index are
> on the cash index rather than the index futures contract, as is the case
> with FSTE options.
>
> The futures are invariably trading at a premium/discount to the cash
> index, especailly at those times where you need to adjust. Can the risk
> characteristics of the futures contract be taken into account to still use
> them to adjust??
>
>
>
>
> Richard