HD, looks like we are working on similar issues. I have tried some concepts for hedging neutral strategies with different results. One of them was short ETF/long ATM Call but not delta neutral, using different ratios, mostly about 1:2. To lower margin requirements I used SSFs, which are OK for ETFs. I have developed my own worksheet for this model, calculating trading range and percentage of breakouts. I think you can get similar results with long/short portfolio, just ranges might differ. I was also thinking about using ETFs OTM options, while they have smaller size, but in a case of breakouts OTMs will pick the values relatively faster. Did you ever consider Dual ICs ? I use Dual Flies with good results and sometimes I stack them on the top of each other. In a case of ICs it might provide much larger profit range, which would be easier to hedge. Thanks for Thanksgiving wishes, All the best,
Hello Dollars, Would you mind elaborating on how you use a large number of contracts to increase your profitability? Do you enter several ICs at once with different strikes, or enter new positions as time passes, or do you leave legs open as you roll up and down, or something else? Thanks for any help.
In repsonse to your questions. 1) I currently do not trade those but I will again very shortly. I'm opening a new account. 2) (a) There are always good calendar plays out there regardless of mkt conditions. (b) Calendars are not the most profitable trade out there but they are very safe conservative plays that can hedge risks from different strategies very well. 3) By legging in, I normally try to pick off just a .05 or .10. I have a very good technique for doing this. If for any reason I miss the other leg then I just eat the loss and put the other leg on. I never fight with the devil. Always leg into long premium first for obvious reasons.
Eldredge, You can add a second condor to your first condor turning it into an albatross. And add yet another turning it into a terdactyl (sp). What you accomplish by doing this is you spread out your profit range but reduce your profit. So if the mkt is pushing against one of your wings you are essentially pushing the wall a little further out and hoping the mkt settles back somewhere in the middle. It's actually a very good strategy. Some guys do this with flies. Turning a butterfly into a condor. You just keep rolling your flies up as the mkt moves from strike to strike.
Eldredge, Maverick answered the question far better than I could. One thing I'd add though. I actually put a good deal of effort each month into establishing my initial position by legging into my iron condors (they're actually iron albatrosses) a vertical spread at a time, selling call spreads into strength and put spreads into weakness. The purpose is to allow me to extend my profit range to approximate the standard deviation range of the underlying and be beyond assessed support/resistance levels without sacrificing much, if anything, in the way of net credits. The risk, obviously, is that I will be overweighted deltas for some period of time each month until the entire position is established. That can last a period of days. Most are not comfortable with this approach given the directional risk, but it's one that's served me reasonably well. And if I do it properly and the market accommodates, I wont have to make any adjustments at all during the life of the position. Of course, life is rarely so simple, and I will thus not hesitate to adjust if need be along the lines described by Maverick. HD
Chris, Interesting. We should compare notes. With regard to your question, I'm not sure what you mean by "dual IC's". Could you give me an example? HD
HD, Actually I might have used improper name, while Maverick explained this technique in details. The difference is, that with Dual IC e.g.: 490/500/520/530 and 500/510/530/540 you get additional possibility to make adjustments during market`s corrections. Two ATM wings of ICs will gain and lose value due to gamma changes, so you may buy your shorts back nad sell them again. Your risk of this trade is just a little higher than for regular IC (plus price of short option which is bought back), but by doing this you buy low and sell high. At many times reverse market`s reaction after such correction can give you chance to reduce risk and sometimes to get free risk trade.
HD -- long vega trades have been brutalized over the last few months, as any quick perusal of a VIX chart will point out. Take a look at at chart of spot/implied vols and you'll see the oscillator trending well > 1.00 -- long calendar spreads have been the worst strategy to trade in this market -- long vega and short gamma. Spot vol increases, albeit slight, have killed short gamma trading coupled with a drop in implied vols. I traded 100k contracts in long time spreads last year, but have traded them VERY sparingly this year. arb.
Mav, thank you for answering my questions. "3) By legging in, I normally try to pick off just a .05 or .10. I have a very good technique for doing this" Can you expand on this technique or is that something you would rather not explain on a public message board?
There are many many safe ways to do this. One is to leg into a trade synthetically for a .05 or .10 cheaper then the actual. The other way I use is to time the delta movements with the mm's autoquote features. It's pretty easy actually.