Hello, I currently hold a 0.13 delta short strangle on CL, feb expiry (futures, options expire in jan). The problem is that put is valued at 1 and call option at 0.5 which is HUGEE difference. I hold several options which makes difference even greater. I know that skew is much bigger now in put option due to recent sell-off so my question is, is it better to just leave this as it is, delta neutral or go for "value neutral" position.. I would much prefer value neutral position because it makes more sense to me. If CL tanks some more at least I do not lose as much value because most of put increase would be offset with call decrease. As it is now if CL tanks puts will likely double from 1 to 2 and my calls would only go from 0.45 to 0.20 so not much protection at all. On the other hand if CL goes up from here I will profit more from the way I have it now, because puts will loose value much faster.. So I guess my position now is delta neutral but on the other hand bullish. IV on puts is really much bigger than on calls now and I think it will somehow normalize in the coming weeks. Also I am thinking that because of those differences I could move calls closer as to have .013 deltas on puts and 0.20 deltas on call OR alternatively to ratio it, to have like 4 puts and 6 calls at the same delta. This still does not completely make it equal value but at least somehow better and probability of expiry ITM stays the same.. All in all how do you deal with such differences, do you usually go for the same or same deltas when selling strangles. I understand such disparity in equities or SPY for example because it is much more likely to crash down than to crash up, but for commodities huge runs higher are just as likely as huge run downs... thanks for help Tomaz
Looks like we found another James Cordier. LOL I hope you will be doing better than him. I think what you need to worry about more is not delta or gamma but just like him, vega, specifically "rogue waves". If another "rogue wave" hits in either direction, you would be really "strangled". If CL goes up, your calls would be screwed and your puts, even though it's more expensive than calls won't save you. If CL goes down, your puts would be screwed and your calls won't save you either. They key is: Hedge!! In terms of the put-call price difference, find out why and adjust accordingly.
Thanks for concern, but I am doing fine I had strangle in place when CL was 74, now at 54 I am sitting at 3.000 USD paper loss, but my legs are puts at 44 and calls at 65 with 55 days to expiry, position value is 5k. If it expires worthless I will turn that 3k loss into 2k profit, and I still have a lot of room for adjustment.. I dont see CL going to 44 in 2 months, because Saudis and OPEC will prevenent that. Also crude usually starts to raise in january, so seasonality is there.. And anyway if it comes near 45 I will just roll it down to 35.. With volatility at 50 which is historically very high I also dont see it going much higher. Yes it can temporarily spike to 80 which I think is record high but even that would not be catastophy for my current position. Currently I am using 10.000 EUR margin in 80.000 EUR account so I hardly see any James Cordier over-extension here. Also I do not touch NG widowmaker anymore, although I did make some nice returns with it last year..
Ok well like I said my overall concern with this trade and with any strangle rather is its potential rise in volatility and with no hedge in place, it gets a little jarring but you are not over-leveraged so I guess and hope we won't be seeing an apology video of you apologizing to yourself. LOL Good luck!! Also good to see also your possible significant other is not a widow.
Yep, I know what you mean, specially after today close "paper loss" now getting Iyuge so I am hoping for at least a day or two of positive action to reduce position from 4 to 2. Talking about a buy and hope huh I am not overly leveraged but this rolling out position is getting on my nerves and with IV making such rapid rises position is balooning. On the other hand I do not want to close it now that IV is freaking high which is the best time to open such position not close it. But I guess this is what James said to himself too I just hope (again hope haha) IB does not come out with unexpected margin increase. Like I said mine is still 10k on 80k account and this is my only position so I guess I am still good for a round of two.. Guess one really has to experience loss first hand to learn a thing of two about picking pennies in front of a steamroller
Well you are gonna have to set up stop-losses at some point and have the guts to execute them. That's the only thing that will save you when the time comes. This is why hedging is so important because if you had hedged, the other side would be helping you right now. Since the option price is so high now, hedging now is not going to help you much (That was probably why James Cordier took some tiny long positions at the other end of tail for $0.009 each to try to hedge if you looked at his spreadsheet LOL) You might want to consider taking a position in the underlying to see if that provides a little bit hedging but you would only be able to take one side per account and you've got two sides to hedge. If you REALLY want to roll to keep the positions, I would roll to a different strike, not to a different calendar. You want theta to play to your advantage a bit. But then again, keep in mind, if the s*** or "rogue wave" is really coming to either or both sides, the lower/higher strike(s) won't save you either. You will still be crushed by the steamroller but you just might, MIGHT be able to save your head, maybe an arm as well. LOL And I will tell you IB DOES raise margin rates impromptu. It's done it several times before with quite a few instruments, forex, futures, VIX instruments when it sees s***storm is coming. It even charges exposure fees to positions that it thinks is too concentrated. So you might not be over-leveraged now but if IB changes margin rates, you never know.
You are right. I am thinking about putting a hedge on with futures, that is shorting CL. As I see it put IV is much higher than call IV and this is what is killing me currently. My put leg is 43 and my call leg was 65, rolled down to 64, 63 and 62 today, but that did not help much, as you said much of the decrease in delta was eaten away by increase in IV. Call IV increase was smaller than put, but still. So I was thinking of shorting CL below 50 with 1 x CL futures contract. If price stays above 50 or goes higher, puts will loose value fast because rising CL should also mean falling IV. It happened a week ago quite dramatically when CL has a few slight positive days. Had I not been greedy at that time, I could unwind the whole position with a 1k loss haha. But yeah, back than 50 on CL seemed barely possible and I thought Saudis will announce cut of production and send CL higher. Now even 40 does not seem that far stretched. CL will eventually go higher for sure, winter + Saudis + OPEC meeting, Russia also not satisfied with this price, but now sure if I will have any money left by then What do you think about the plan to short CL below 50? If it goes to like 45, my puts will increase for about 5k, but at the same time I would have 5k profit on futures short + some additional from call leg. The only problem I see here is whipsaw. Price sticking to 50, going a bit above then below, bouncing above etc which would kick me out of position and I would have to watch the market.. When you mention rolling to different strikes, you mean closer to the money on the call side right?
No if you are going to roll, you should roll it to higher strikes for the call when the underlying is rising, and lower strikes for the put when the underlying is falling. This is what I would do, farther OTM because the volatility is high right now and if it's going to increase further, you want to minimize the chance of getting hit by the steamroller especially if it's going to whipshaw. With the PA right now, it can go both ways for about 20+ at least and 50 is right at the middle. For me, I would actually roll the put and hedge the call by buying the CL. Even though your strikes for both puts and calls are pretty close to the support and resistance levels but given the seasonality the CL might go up as it's sitting quite close to a previous support at 45 and plus giving the unlimited up potential, the risk of a short-squeeze is higher. Whereas for put, your strike is already quite close to a support level so if you want to roll it just to be safer, you just need to roll it down another 10 to maybe 30 or below and that's the support from 2 years ago and 30 is quite a significant support. Although I can see from a profitability point of view, it might be better to roll up the cheaper call.
Thanks for help man. I misunderstood the part with theta decay, I thought you mean I should go for higher theta which would mean closer to the money, when what you meant was that at 54 days to options expiration, theta is still relatively low and will kick later on when expiration is nearer.. I will go through your reply more in detail tomorrow and try to make a battle plan for monday. Many possible scenarios go through my head, from hedging to closing the position only 50 % and trying to manage the remaining 50 % to the expiration which would get me to at least small loss or to just close it completely, which would then if volatility falls drive me crazy haha.. You know how it is, most people usually throw in the towel just when turning point is just around the corner, but you can only know that after the fact. My mistake was adding to position, started with 2 calls and 2 puts, then said to myself ah it should not stay at IV = 55 and add another one to take advantage of high IV only to watch it go even higher.. Dont think I will touch strangles ever again haha. Hope someone else can learn from this too For rolling the strikes on put side down to 30, is it better to wait a bit, with 54 days still to expiration or would you do it immediately? In this case I would have to double the position to get some premium, because right now my 43 puts are much more expensive than 30 are. Or do you mean to just take the loss and try to get back at least some money with 30s? And you are right, theta is relatively low 54 days out compared to vega.. In Jan expiration 20 delta theta is twice the vega on the call side, that protection would surely help, could also be doable to have puts in feb and hedge with jan calls
Or you can hedge both sides but you are gonna have to spend a bit on commissions. You can buy a CL call and a put, either turning it into an iron condor or a bull spread on one side and vertical put on another depending on how you see the market. Since the put is more expensive and your put strike is already setting quite close to a support level, a vertical put spread still wouldn't cut into your profitability much and at the same time would provide you some downside protection. For the call side, if you see a significant rise in CL in the next 3 months, a bull spread would guarantee you be definitely able to take advantage of the rise in volatility. If you only see some rise in volatility in the upside, then at least a vertical call spread would you enjoy the premium but at the same time give you some protection if it REALLY goes into a "rogue wave". I think it's better that you hedge both sides. I would do that if I were you.