Spin, Omaha steaks?? That's what comes out of the back of an Alberta steer!!! Seriously, Alberta AAA beef aged 28 days is better than anywhere else except for beer fed Japanese beef, which is a little hard to get around here. I've eaten beef all over North America and in the UK and Ireland (over in Europe, the beef is garbage-- grass fed-- tastes like a tough dandelion salad) and corn fed beef is simply not as good as barley fed beef. Come on up and I'll prove it to you. Mind you, you might find the winters a bit tough up here. Try July, when the weather is very nice. Our mountains are also extremely nice. I'd be glad to show you and Walt around. Now for the options: I randomly selected Google as a possible play. There may be others that are much better, and I haven't a clue when earnings are coming out or anything like that. I'm just keeping things very simple for purposes of doing a calendar collar. I'm also going to assume that the IV will not be changing, although in real life, I'm sure that it will! Here's what I came up with: Stock price at Thursday close-- 618.48 Feb 620 Calls-- 24.25 (midpoint price) Jan 620 Puts-- 13.25 (midpoint price) This means you own the collar plus you have a cash credit of $11.00 . At any point in the future before the Jan expiry, if you can obtain the Feb 620 put for less than $11.00, or repurchase the call for less than $11, you will be ahead of the game. Now I have used the Jan options chain and the Feb options chain to estimate prices at the Jan expiry. We have less than three weeks to go until the Jan expiry, with the Jan 1 holiday considered in the mix, so prices at expiry will be slightly higher than the current Jan prices as a quick rule of thumb. Now, I'm going to envision three cases-- A) GOOG goes down $30 or about 10% B) GOOG stays at the current price C) GOOG goes up $30 or about 10% In A the value of the stock plus the put= $620 as it will for any point below $620. The calculated value of the call will be about $3.50 to $4.00. I obtained this by moving up the chain 30 dollars and adding a little extra time value, as the Jan 650 call is currently valued at $2.88. Purchasing a new put would cost about $30-35 dollars which would not work very well. However, with your $11 in cash, you could easily buy back the call, and come out ahead by about $6 or $7 on the deal. In B, the value of the stock plus the put is also $620. However, at the Jan expiry, the call will still be worth more than $11, and the new put will probably cost around $14 or $15, or a little more than now. This means a small loss of about $3-4 in the cash position, and a small net loss of about $2-3. In C, the value of the stock would be about $650, a nice gain in stock value, the put would be worthless, but the call would have increased in value. To obtain its value, I moved $30 in the call chain the other way and added a little time value. This gave me about $34 or so. I still have the $11 in cash, which I could use to buy a cheap put. I estimate the cost of the new put at around 5-6 dollars. In this case, it could make sense to buy the put and have about 5-6 dollars in cash to be ahead of the game. You also could simply sell out and take your small profit. Note that this is only a profit of about 1% of the original capital required to play without margin. Note that a person can adjust the position at anytime if it seems the prices are relatively favourable. I'd give this a decent chance of modest success, at the very least. I think it is clear that decent movement in either direction leads to happy results, and no movement or very small movements lead to small losses.
Thanks for the detailed analysis. But before going forward, a clarification. I thought that we were talking about a collar (see your post on page 2). To me that would mean a Feb 630 call and a Jan 620 put. You're using the same strike in your example. Either we're talking about 2 different positions or I'm having a senior moment.
thanks for the invite John... If we're able to enhance a particular strategy and achieve consistent & exceptional profit objectives, I just may take you up on that offer. I appreciate the contributions and insights from John and Spin. We'll be watching how Google pans out. At some point tonight, I'll post the risk and probability scenario of the DBWB, the Collar or Vertical Spread, and the Short Strangle with long ratio wings for "black swan" protection. The risk/probability calculator will be from Optionsxpress. Although it's not as robust as OptionVue, it still gives worthwhile information. Stay Tuned...
I ran the numbers for a calendar collar, short strangle with long backspreads, & Double Broken Wing Butterfly (DBWB). I did the test on the S&P e-mini futures, which has a typical daily range of at least 10 points. I prefer the futures because of the favorable SPAN margin and the leverage. The results from Optionxpress's "Trade & Probability Calculator" are as follows: Calendar Collar: current price - 1121.00 buy 1 March contract - 1121.00 buy 1 Jan 1120P - 16.25 sell 1 Feb 1125C - (30.00) lower b/e - </= 1104.00 upper b/e - >/= 1135.50 The b/e or profit range is 31.5 points or greater. For example, if the market is greater than 1135.50 or less than 1104.00 by Jan 15th, then this strategy will be profitable. Nonetheless, extreme moves up or down is needed for this to be very profitable. For example, if the market is trading at 1177.50 by the 15th, then this strategy would realize a 153.4% return on initial risk margin. In similar fashion, if the market is trading at 1063.25 by the 15th, then a 122.5% return on initial risk margin would be realized. DBWB: current price - 1121.75 buy 1 Jan 1110P - 12.50 sell 2 Jan 1105 P - (11.00) buy 1 Jan 1095 P - 8.50 buy 1 Jan 1135C - 10.25 sell 2 Jan 1140C - (8.50) buy 1 Jan 1150C - 5.50 b/e range - >/= 1097.75 - </= 1147.25 The b/e range is within 49.5 points. Therefore, if the market does not move more than 25 points up or down by the 15th of Jan, then the DBWB is profitable. Remember that the daily range is typically 10 points or more. The return on initial risk margin is 43.9%. However, if the market is at or near the short strike price at expiration, then the return on initial risk margin will be substantially higher. Short Strangle w/"black swan backspreads": current price - 1120.75 sell 1 Jan 1110P - (12.50) sell 1 Jan 1135C - (10.25) sell 1 Jan 1010P - (1.75) buy 2 Jan 1005P - 1.60 sell 1 Jan 1220C - (0.25) buy 2 Jan 1225C - 0.20 b/e range - >/= 1089.00 - </= 1156.25 The b/e range is within 67.25 points. Therefore, if the market does not move more than 33 points up or down by the 15th of Jan, then the short strange w/backspreads will be profitable. The return on initial risk margin is 33.2%. Overall, it seems that the DBWB is the least risky strategy, as the potential loss is 53.7% of initial margin at risk; whereas, the calendar collar and the short strangle were 89.2% and 139.4%, respectively. However, the short strangle appears to be the easiest to roll, and therefore the strategy with the best positive expectancy. I'm really not concerned about the maximum risk %, as that would represent the "worst case - black swan" scenario. In most cases, I would be able to adjust or close-out the short strangle or the DBWB at or around b/e. An advantage of the short strangle over the DBWB is the ability to realize a material profit before expiration. The DBWB won't realize its profit until about the expiration date. However, the short strangle typically provides the opportunity to exit with a profit much sooner. This also contributes to the favorable positive expectancy of the short strangle. Let me know if you have any insights or rebuttals on the above info... Thanks, Walt
Nice comparison of the 3 positions and I agree with almost all of your conclusions. I'd add that the DBWB is not going to be very sensitve to price or IV change. The other two positions will be smacked by IV increase and/or price movement. The ability of the short strangle to realize a material profit before expiration is dependent on the passage of time. If price moves dramatically shortly after opening the position, you'll have no chance to break even. So I would not agree that they have the best "expected return" which I'm assuming is what you mean by positive expectancy.
Good points Spin... It's hard to argue with logic... I think this line of discussion may have opened some real possibilities for combining various strategies for a favorable risk:reward hedge. In other words, perhaps the calendar collar can be used to hedge against the DBWB or Short Strangle. Therefore, if the market remains range bound the DBWB or Short Strangle will be profitable; however, if the market has a big break-out (up or down), then the calendar collar will be profitable. The trick is to ensure that the loss on a given hedge is less than the profit of the offsetting hedge...
Walt, Re: your straddles/backspreads. Look at placing your backspreads in a deferred month, with the short strikes nearer ATM such that there is a small net debit or credit on each backspread. You'll have to vary the number of short straddles or strangles in the front month to get a greek profile that satisfies your risk parameters. If you plan this as a perpetual position, over time you can put the backspreads on when vol bleeds and put the short straddles on when vol bumps.
Walt, I'm convinced that the risk profile that I'm looking for is going to come from a blend of several stratgies or one strategy with extra leg(s) added. I just don't know what that is yet. I'd like something like the DBWB but with a tad more profit potential but still maintaining the wide profit zone and initial positive return if a move is made toward the wings. I know it's a function of a lot of tinkering in a modeling program and that just takes a lot of time until the right combination is found. The search continues
If the total position is a combination of short strangles and and protective backspreads, how can one add one component when vol. is high and the other when low and end uop with the composite position? I have no problem with legging in but that's what you're suggesting but that doesn't always get you there (I'm assuming that vol. doesn't bleed and reverse intraday). What am I missing?