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spindr0
Registered: Nov 2005
Posts: 4166 |
03-09-12 02:27 AM
Quote from jkgraham:
Has anyone ever bought Reverse Iron Condors before earnings? They look like an interesting alternative to Straddles and Strangles because they "could" costs less and have a smaller window of failure, but with less profit as the trade-off. If you use them, do you have any rules or suggestions on how to implement them? Would you do them on the weeklies? It looks interesting but doesn't get much attention. I wonder why?
Not a good idea. The IV contraction is going to whack the body more and move to strike will whack the other side.
For the short wings, the IV contraction gain is smaller and the smaller premium doesn't offset the losses from the long strad until well outside a short strike.
And then there's mlutiple leg slippage and commish.
Diagonalized positions may be of interest in high month to moth skew situations but that's another story.
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spindr0
Registered: Nov 2005
Posts: 4166 |
03-09-12 02:28 AM
Quote from newwurldmn:
But if you are going to buy volatility for a big move, why would you cap your upside by selling anything. Especially when they are deep otm wings where premium received is small and convexity risks are very high.
If he's buying volatility pre EA, he better be darn good at picking big movers.
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spindr0
Registered: Nov 2005
Posts: 4166 |
03-09-12 02:39 AM
Quote from jkgraham:
In other words buy two ATM options (+1 PUT and +1 CALL) and sell (-1 CALL) one strike up and sell (-1 PUT) one strike down. The result was about a 10% gain with a breakeven range one strike above and below the center. It's cheaper than both the Straddle and Strangle, has less chance of losing but a lower return.
Because there are multiple variables involved (skew, strike width, amt of IV expansion, time until exp, time held, etc.), there isn't a one size fits all answer. But as a generalization, I doubt that you're going to net a 10% gain on a move to short strike one out. And since IC's a relatively low cost, 10% avg gain isn't a great result considering the slippage.
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newwurldmn
Registered: Apr 2011
Posts: 2628 |
03-09-12 03:00 AM
Quote from jkgraham:
So would you be willing to trade 'A' instead of 'B' if it succeeded more often even though it paid less?
Because the probabilities over the long run matter. Remember you are taking the view that a big move will happen. There's no point buying volatility if you don't think the makret is mispricing the probability of a big move is there. Otherwise you are paying too much because options price in that Convexity (There's that big word again).
Say earnings are pricing 5%. You think the stock is going to move 6%. That is not a compelling trade. If you think the stock is going to move 10%, it is very compelling. If you think the stock will move 6% and has a possibility of moving 10%, then it's compelling enough to do the trade.
The market won't give you much for selling the 10% move risk. The market won't give you much for the 7% move risk. So why bother?
Payouts in options are not like stocks. They are lumpy. Lots of small gains and a few big ones. Which side you are on during the many small gains and the few bigs ones culminate in your total pnl.
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jkgraham
Registered: Apr 2011
Posts: 79 |
03-09-12 03:09 AM
Quote from spindr0:
Not a good idea. The IV contraction is going to whack the body more and move to strike will whack the other side.
For the short wings, the IV contraction gain is smaller and the smaller premium doesn't offset the losses from the long strad until well outside a short strike.
And then there's mlutiple leg slippage and commish.
Diagonalized positions may be of interest in high month to moth skew situations but that's another story.
On the RIC, if the underlying moves up or down more than $5(or one strike) at closing it will make money, end of story. At that point, IV contraction doesn't matter, Convexity doesn't matter.
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