Can you construct such a P/L graph with any options combos?

Discussion in 'Options' started by DerivativesG, Jun 8, 2011.

  1. Hello everyone,
    Okay this was passed onto me by a fellow trader.
    He suggested that someone he knew constructed such combo position that had the following P/L graph.
    Does such a combo position exist? What is it called?
  2. MTE


    Yes, you can construct a position like that. I don't think there is a formal name for it.

    Basically, it involves a call backspread with an extra OTM short call and a put backspread with an extra OTM short put. Here's an example:

    Short 1 145 put
    Long 2 155 puts
    Short 1 160 put

    Short 1 170 call
    Long 2 175 calls
    Short 1 185 call
  3. MTE, thank you for your reply.

    What would be the logic behind taking such a position?
    To be delta neutral?
  4. MTE


    You don't need 6 legs to be delta neutral.

    This could be something that was legged into over time, i.e. the position started out as a simple position and then as the market moved around the person added positions and morphed it into the one in question.

    If it was set up in a single trade then with two backspreads you expect the stock to make a big move either way, but the debit paid may have been too great so additional short OTM options were used to reduce the net debit.
  5. MTE,

    Another additional thing I know about this combo position is that the person who would do this position would do this with options that would expire in 90 days and before the expiration he would roll out the position to the next month. Do you see any logic in that. I mean from the description given to me it's not a trade that evolved from reducing the debit or anything, the person who puts this trade on always positions himself with 6 legs. I mean when he re-enters this combo trade everytime, he makes sure he gets filled for all the 6 legs on the same day.
  6. "Broker's Delight" perhaps?.:D

    Very strange to put something like that all at once. Looks like something that was legged into over time, like MTE said.
  7. MTE


    The first thing that comes to mind is that person is probably one of the best clients for his/her broker. Paying commissions on 6 legs on the way in and then rolling it out adds up to quite a bit.

    Otherwise it's hard to say why would anyone trade this way, but, hey, who am I to judge. If it works for him/her then why not.
  8. lol@eudaemon, okay I guess you right, maybe the guy who was telling
    about his position did not want to give away his cause
    for entering this trade and he told people he gets all
    6 legs filled at the same time.
  9. Ok, I agree with you as far as the commissions are concerned. The person who does this trade is trader at a hedge fund. He used to earn a lot from this position until early 2009. He still puts on this position but he said to my friend that this position does not bring him as much as it used to.
  10. MTE


    As I said, this position works well if there is a big move up or down, if the market stays at the short strikes then you end up with a loss.
    #10     Jun 9, 2011