And are there ways to improve its return? Take Goog for example: Buy X 440 Calls Sell Y 470 Calls Buy Z 430 Puts Buy X 530 Puts Sell Y 500 Puts Buy Z 520 Calls Put this position on just as Theta starts to pick up. The return seems decent with X=Y=Z=1 and as the underlying moves $10 in either direction just repeat and put on another one of these and hold all until expiration.
It looks like a synthetic backspread or synthetic wrangle (ITM version with the longs split across two strikes). I don't think there's anything about this that is more preferred over using the OTMs. Risk is the big dips between short and long strikes (just like all backspreads).
Yes you are right about that. You don't exit, you stay in until expiration and keep putting on new ones each time the underlying hits a new strike. If it comes back to a previous strike you have already used to put on a position you just sit pat. You don't initiate any new positions within 2 weeks of expiration and you don't put this trade on more than 2 months out. I am wondering if I should fiddle about with ratios to make it delta neutral and potentially more profitable but have resisted doing so because it would change the margin situation and increase risk (and I am not sophisticated enough with options to be confident that I would be able to manage a more complicated strategy, though I am working to change that with the help of the risk doctor's latest book). One thing that I thought of doing was maybe changing the ratios and buying some OTM calls on the vix as a bit of a hedge against an increase in volatility (9/11 type event) but have been burned with vix options in the past. Maybe options on the sector index? I am primarily a directional trader but some years I do well enough that I have some extra cash to push around and not enough opportunities that i feel comfortable committing it to and so I do stuff like this to increase my annual return but it has worked well in the past and I am thinking of setting up another account that just trades this strategy as it is more or less market neutral and will help me in years when the chop is killing me on my directional trades.
How would it work using OTM strikes? Yes the big dips, that is why you have to keep putting on new positions as you reach new strikes capturing the increase in volatility to help you. Also, the outliers (in this case the 520 calls and the 430 puts mitigating somewhat. These are perhaps where some ratio adjustment would be most useful in improving the numbers on the position. A big move on the day of expiration could cause some problems especially if the position was loaded at multiple strikes but it would have to be a really big move and even then the losses would be limited. Does anyone know of a option screener out there that can look for trades like this so you can set it to filter for a certain rate of return?
You're buying 30 point ITM verticals on each side for a couple points each. Consider that the risk and reward for the debit spread is identical to a credit spread at the same strikes. For instance your long 440, short 470 call spread is the same as a short 470, long 440 put spread. They both yield the same risk and reward. Combine that with the long 430 puts and you have a backspread, short 1 470 put, long 1 440 put, and long 1 430 put. Do that on the call side to and it's similar to a wrangle. Most people do these with OTMs, probably because the spreads are tighter...
This is a martingale strategy. It works if you have the cash to indefinitely buy 30 point ITM verticals...