DITM strangle?

Discussion in 'Options' started by serrow, Jun 6, 2007.

  1. serrow


    I really like the way that DEEP ITM puts and calls behave when they are close to expiration. Love the idea of buying something so closely matching the underlying with so little time value to lose. My question comes when keeping a neutral delta between puts and calls.

    any profit making scenarios for say, buying into the strangle (I believe its a strangle anyway) and then selling when one leg swings, then selling a call or put for protection on the other side?



    BUY 30 CALL
    BUY 50 PUT

    when underlying goes to 35

    sell 50 put
    sell atm call

    I am stating my rookiness, but i'd enjoy hearing about possible strategies in using deep ITM calls and puts that could possibly allow for some protection.
  2. Paging iv_trader to the thread. In search of Da DITM edge.
  3. nikko309


    Initially, both DITM options will be trading at parity and will have a delta of +100/-100 and your net delta will be zero. With a drop of 5 pts, both options will still have the same delta. For all intents and purposes, you will have a 5 pt gain on the put and a 5 pt loss on the call.

    What have you achieved? You now have a realized gain of 5 pts from selling the put and a paper loss of 5 pts on the call. 4 B/A spreads to fight as well as 4 commissions. And now you want to hedge the call with the 5 pt loss with fresh money?

    FWIW, this is called a guts strangle. It basically produces the same result as the same strike, OTM strangle. There's no significant payoff unless you get past the strikes which is unlikely since you're near expiration.
  4. Correction : I renamed it to Rho edge.
    I even may change my handle soon to Rho_Trader after first 1000% profit.
    What time is it now ?
  5. Maverick74


    There is no basically. It's a synthetic strangle. Exact same position.
  6. Prevail

    Prevail Guest

    and if you are that good at predicting direction, just trade directionally.
  7. nikko309


    I would have been more impressed if you mentioned the wider B/A spreads and the extra commissions.
  8. Not to mention the increased risk of early assignment for the ditm legs :).
  9. nikko309


    I would have been more impressed with that as well ! :D
  10. hi folks! I believe serrows original post was misunderstood. What i think he/she was getting at is being LONG (not short) the DITM gut strangle then if the underlying moves, selling a juicy (in time value) ATM option against it. Its a strategy that seems to have merit as long as the gut strangle is a farther month. Example stock at 40. Long the 35 45 October gut (long 35 put 45 call). Stock moves to 44. Sell September 45 call (which will be rather expensive. You wont make or lose much on your long options but can bring in time value from your shorts. Synthetically the gut is the same as the long strangle though. Comments?
    #10     Aug 11, 2007