Enhanced premium strategy

Discussion in 'Options' started by samer1, Jun 30, 2013.

  1. samer1


    Lots of option players are into short premium strategies like iron condors, short strangles, short straddles, short otm puts, etc...

    However these strategies suffer from two developments:

    -) Short gamma
    -) Short vega

    If the market crashes, these strategies will blow up.

    I have been playing with some complex option strategies and would like to ask you for your opinion.

    The picture attached shows an interesting option strategy, that seems to solve the short gamma problem. It is still short vega... But it is worth a try...

    The margin that you see is based on a standard account (not a margin account!)...

    • spy.jpg
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  2. all strategies invloved in margin trading options are bad. just my two cents.

    I just do not understandwhy people want to lose infinte,but gain is limited. I want mygain to be unlimited/infinite,but my loss is limited no matter what happens.
  3. Is it cost effective from a commission standpoint?
    Can't see how many legs/contracts are needed to get the profile, but it looks fairly complicated.

    Also, I don't really see the point of the right portion of the graph. If you get a 10% move, you start to lose. If you get a nice big move, you are back to basically a scratch.

    Couldn't you get pretty close to the graph with something like a broken-wing butterfly?
  4. I don't see the point of this position over trading the underlying in D1. You flip modality up and down.
  5. I applaud your exploration of different option strategies, but in my opinion this looks pretty overcomplicated. You do not include what the legs are, but at first glance to me it looks like some type of variant on an SPY put backspread, without the potential for unlimited gain and with unlimited risk. If SPY stays above 135 by expiration, you essentially break even after commissions. If it is between 122 and 135, then you lose a lot. Only between 101 and 122 (which requires a 25% downward move in the market) do you make money. Below that, you blow up. You are basically betting on a black swan or major bear market (but not too much of one) taking place before expiry, but there are more efficient ways to do that without taking on the unlimited risk you have in this spread and with a better chance of making money.

    What are you really trying to achieve? From your post it sounds like you want to be short gamma/vega on SPY, but are concerned about the crash risk. If that is the case, then I would suggest looking at butterflies (which are a short straddle with long wings as protection), including broken wing (skipping one or more strikes and potentially with an asymmetric number of options at each strike that net out to zero). If you want to bet that SPY will crash, then a put backspread is an option, or as Atticus notes just taking a short SPY position is an option that would avoid the flipping (modality) on the p/l graph as the price drops.
  6. newwurldmn


    If you are receiving theta then you are short some kind of convexity that can get really nasty.
  7. samer1


    The strategy consists of three legs and 15 option contracts.

    I think the commissions are acceptable to get this pnl profile.

    What I want to achieve is this:

    - Profit over a wide range of prices. The light blue area shows the 68% percentile of the price. As you can see, the strategy will deliver a profit. To the right (as the price increases), the strategy makes a profit of round 160 USD.

    - Crash risk. I want to be protected as prices crash. Other long theta strategies, including butterflies, do not have the crash protection...
  8. It sounds like you are very wedded to this strategy, so I wish you the best and truly hope that you make money using it and do not blow up. For what it's worth, though, in my opinion:

    - Using 17K in margin to make a hundred bucks is not a good use of margin.
    - Your crash risk is enormous, and virtually unlimited, since you appear to be naked short options on the downside.
    - There is no free lunch; if you want to accrue theta then you will have gamma risk. You are nearly gamma neutral at this price and time but clearly are not as the price decreases, as shown in the price slices and p/l graph.
    - In the future, if you provide the legs of the contract in the picture it can help folks to provide more detailed feedback.
    - There are much better ways to profit from a range of prices, but while having limited risk. The posts above offer suggestions in that regard.

    Again, good luck!
  9. newwurldmn


    i don't understand why people don't share the actual position in these threads. Are they afraid someone else will steal it.

    There's virtually no risk basket that hasn't been explored by the veterans on this board.

    Anyway, you can't receive theta without taking on some kind of short convexity. So what is the short convexity in this trade? If you don't know then you don't understand the structure.

    If you give us the structure someone can tell you your short convexity position in 10 seconds,and you can decide if that position is worth it.

    Until then this will not be as useful of a discussion as you would like.
  10. samer1


    The high margin can be circumvented by switching to a margin account.

    For me, the crash risk is very limited. The white line in the graph represents the immediate PnL line. As you can see it goes higher as the price goes down.

    If you have another strategy that can generate premium and has limited downside risk, please feel free to share the PNL graph. I do not need the positions, since I can figure them out.

    #10     Jul 1, 2013