1) let's say I am an iron condor seller who buys put and calls to adjust for movements in the underlying Conversely for other stocks, 2) I Buy flys and sell puts and calls to remain delta neural. Given the 2 or more stocks have some correlation to index. What risks remain when I combine those 2 strategies in an option portfolio? Please try to keep the level of discussion geared towards resources available in the average brokerage account/trader........at first.Thanks.
It depends on how many stocks you are doing this with... Obviously if you are long vol in one stock and short vol in another stock there will be some correlation between the prices movements of the two, but I would not be comfortable saying that I'm market vol neutral if I were using historical measures of beta for two stocks.
No, the IC will be either overwhelmed by the delta in the P/C hedge, or it will be no hedge at all. The long flies and short C/Ps are simply increasing your gamma risk. You tail-risk increases; corr goes to one and you die. It's a concentration strategy, not diversification.
Wth? You just totally sunk my boat. Guess I gotta hit Sinclair's books a little harder for theory. Augen's workbook seems promising that he makes me think thru trades and spreads but it ends with just a complex spread...not a portfolio concept. Thanks.
You would be better off hedging the flies with stock, so you can keep your greek profile in tact, or, better yet, don't hedge at all. If you are concentrated in long flies in single stocks (short v/g), go to index to neutralize. Your book will somewhat replicate pseudo short-dispersion. But, take the prevailing correlation into account (constituents vs. basket). Of course there are cleaner ways to do this.
I would toss Augen out. Sinclair is good, but from the position of a single-name MMing operation. Your not going to locate routine vertical edge that is beyond NBBO (Sinclair). Calendar edge is a whole different risk. Lots of edge but harder to trade. It's always best to cover than hedge when trading an IC.
Sinclair and Hull are always good (so is Baird), the rest is pretty much garbage. But like you said, the text is geared toward MMing. As a single trader you won't trade the style that the book focuses on. But, you will benefit from understanding the structure of options and the pricing models. Once you know this stuff cold, you will begin to have an intuitive understanding of how the option market behaves, given price/vol changes. No one is going to tell you exactly how/when to make specific options trades. If they did, it wouldn't work for long, and they wouldn't need to sell books/courses since their trading is so profitable.