Elite Trader

Elite Trader (http://www.elitetrader.com/vb/index.php)
-   Options (http://www.elitetrader.com/vb/forumdisplay.php?f=12)
-   -   Adjustment for short strangle (http://www.elitetrader.com/vb/showthread.php?t=172980)

hedgex Aug 12th, 2009 01:16 AM

Adjustment for short strangle
 
Reading the book The Option Trader Handbook for adjustments for short strangle and got disappointed as the book says that there is nothing you can do, I got an idea.

You can keeping making up for strong moves in the underlying and never lose.

Suppose stock XYZ is trading at 25 and you short a strangle: put@20 and call @30.

If XYZ moves to 30, you sell a put at 35. IF it moves to 35, you sell a put at 40. On the way down, if it moves to 20, you sell a call at 15. If you draw the P/L chart, you'll see that you are always ahead of a loss, always in the profit zone.

This operation should be generally applicable. If you are short a call and the market goes against you, you just sell a put ITM at a higher strike to counter the loss on the call. If you keep doing this within the same expiry date, some options will end up ITM but you still win.

Has anyone tried this strategy?

Norman_Shey Aug 12th, 2009 01:36 AM

Nice try but not.

If you sell the next put out after it moves that's fine, but you won't get enough for it to make up for the loss on the put you already are short. You're just digging a bigger and bigger hole is all.

MTE Aug 12th, 2009 04:51 AM

Re: Adjustment for short strangle
 
Quote:

Quote from hedgex:

Reading the book The Option Trader Handbook for adjustments for short strangle and got disappointed as the book says that there is nothing you can do, I got an idea.

You can keeping making up for strong moves in the underlying and never lose.

Suppose stock XYZ is trading at 25 and you short a strangle: put@20 and call @30.

If XYZ moves to 30, you sell a put at 35. IF it moves to 35, you sell a put at 40. On the way down, if it moves to 20, you sell a call at 15. If you draw the P/L chart, you'll see that you are always ahead of a loss, always in the profit zone.

This operation should be generally applicable. If you are short a call and the market goes against you, you just sell a put ITM at a higher strike to counter the loss on the call. If you keep doing this within the same expiry date, some options will end up ITM but you still win.

Has anyone tried this strategy?

Good luck with this strategy!

wayneL Aug 12th, 2009 06:44 AM

Like Norman & MTE say... Good luck (but it won't work)

You can hedge delta with underlying or morph the strangle gradually with verticals, keeping delta neutrality... buuuut you're effectively gamma scalping in reverse.

If +decay > the losses you lock in when you hedge, you make a profit. If not, you lose.

You can end up right when you're wrong doing this, but you can also ending making yourself wrong when you were right.

A cautionary note from Cottle in "The Hidden reality":
"Firstly, here is the reason biggest reason anyone losses money [in options trading]: EGO!

With options traders it is exacerbated by the fact that options trader’s think they are so smart.

When other traders are wrong they get out and move on.

When options traders are wrong they try to brain their way out of it or convince themselves that there is a better way --- a repair strategy"

spindr0 Aug 12th, 2009 07:24 AM

Re: Adjustment for short strangle
 
Quote:

Quote from hedgex:

You can keep making up for strong moves in the underlying and never lose.
Man those are good mushrooms are good!


Quote:

Suppose stock XYZ is trading at 25 and you short a strangle: put@20 and call @30.

If XYZ moves to 30, you sell a put at 35. IF it moves to 35, you sell a put at 40. On the way down, if it moves to 20, you sell a call at 15. If you draw the P/L chart, you'll see that you are always ahead of a loss, always in the profit zone.
As the underlying continues to move against you, the delta of the newly sold option will decrease while that of the short option that you're defending will remain constant at one. As they slowly suuuuck the cash from your account, your next light bulb moment will be overwriting. :)

wayneL Aug 12th, 2009 07:26 AM

Quote:

Quote from wayneL:


"Firstly, here is the reason biggest reason anyone losses money [in options trading]: EGO!

With options traders it is exacerbated by the fact that options trader’s think they are so smart.

When other traders are wrong they get out and move on.

When options traders are wrong they try to brain their way out of it or convince themselves that there is a better way --- a repair strategy"

This may be wrongly attributed. Upon checking Hidden Reality, this quote does not seem to appear in there.

Apologies if so.

But still a good quote, whoever said it or wherever it is from.


All times are GMT -4. The time now is 07:49 PM.