Determining the best strike combos for an OTM Strangle ?

Discussion in 'Options' started by Aston01, Mar 1, 2012.

  1. Aston01

    Aston01

    Still learning the ropes and I have a question hopefully someone can help me with in regard to OTM strangles or any multiple leg strategies for that matter.

    I am trying to determine which combination of put and call strike makes the most effective combo for an expected 2% move in the underlying.

    Where I am running into an issue is I can plug & play the different combos of strikes & contracts qty with a set amount of capital allotted to each side, but things get out of balance.

    I was wondering if there is a more efficient way to determine the correct strikes and contract ratios that bypasses the plug & play method ?
     
  2. What precisely are you trying to maximize/minimize and what are the constraints?
     
  3. Unless the UL is an ultra low IV stock, a 2% move is pretty much a loser for an OTM strangle unless the strikes are $1 away from the UL and the move occurs yesterday. It's a low probabiity trade. Any chance you can find some 5% movers in your bag of tricks?
     
  4. 1) You can only know the "optimal" combo in hindsight. :(
    2) In addition to a price forecast, you need to have a volatility forecast. :cool:
    3) Your position can be initiated in "balance" but will always come out of balance with the passage of time, price movement and volatility fluctuation. It'll be up to you as to how you manage it going forward. :)
     
  5. Aston01

    Aston01

    All that being said how do you balance the quantity use in the different legs? Do you use a set $ amount for each side ?