Just reading through Option Market Making again and came across a chapter that I missed completely the first time around.. After discussing the pros and cons of various strategies he arrives at the conclusion that the best holding a trader can have is a +theta +gamma position, achieved by going long flies in the front month and long wrangles in the back month. Cottle's Slingshot hedge method attempts something similar (in the front month only). Something I didn't fully understand: does Baird mean that market makers should try to manage their books to be as close to this structure as possible? Or is he implying that its a viable outright trade? I think I can just about understand the limitations of a position like this, such as the big profit holes either side of the front month wings, growing cost of adjustments/hedging in choppy markets etc etc; Its seems like a brute of thing for the regular retail trader... I'm interested in how readers thought about this and the concept generally. Does anyone here trade in a similar way? How do you deal with entries / exits, legging in and out? What about whipsaw/choppy markets, how do you hedge, and is it worth all the trouble?
I'm interested in how readers thought about this and the concept generally. Does anyone here trade in a similar way? How do you deal with entries / exits, legging in and out? What about whipsaw/choppy markets, how do you hedge, and is it worth all the trouble? [/B][/QUOTE] I trade retail, and use this approach routinely. You have your usual entry triggers for verticals and time spreads, but in addition, keep additional wingstrikes in deferred months. I keep vega hedged to some extent in all expiration series. As back month nears front month status, short some additional straddles when conditions are favorable to turn that same near front month position into something that looks like a fly. Of course, over time there will be short and long positions at many different strikes in each expiration series. Tough to manage without analytics. More akin to managing inventory, not simply speculating on price or vol. Occasionally you get lucky, but I wouldn't count on it. I think risk reduction is its greatest attribute. Boring, but safe.
Out of curiosity Sonoma, what are you trading and whom with? The way you're doing it is how I envisaged it could be from a retailers point of view, its encouraging to hear.
Index products with thinkorswim. Take today for instance. If you had additional long wingstrikes on the May expiry series, you could take advantage of the pop in vol to short straddles ATM near the close. Of course, you could do the same thing today with an iron fly, but owning the additional wingstrikes already, allows you to short premium when optimal and not buy the wings until later, hopefully after vol or time has moved in your favor. Every few weeks there's usually a day or two when conditions are good for selling premium. If you're lucky, in between there are days where vol decreases out of proportion to spot movement and that's when you can buy those deferred month flys with the additional wings.