Hedging a short straddle position

Discussion in 'Options' started by SleepingGiant, Dec 1, 2003.

  1. Let's assume that I am short a straddle, but I don't want to carry a naked position. Please correct me if I'm wrong but I could hedge this position by buying the same straddle with a different expiration (e.g., short Jan 50 straddle, long Mar 50 straddle).

    Is this the best way to hedge a short straddle position?

  2. sle


    this would give you a calendar - see next thread :)
  3. Yes. That would convert the position to a long call and put calender. You should check the volatility skew, if any, before making such an adjustment. An alternative would be to buy the same month strangle, converting the position to an iron butterfly. Or, if you wanted to be positive vega, you could combine the two, buying an out month strangle, resulting in a double diagonal. With any of these, you will have limited risk.
  4. Maverick74


    Iron Condor
  5. jessie


    That would generally help with an equity option straddle, but with options on futures, it is entirely possible (and common) for the two front months to move violently in opposite directions. (this happens often when there is particular abundance or shortage in the front delivery month of ags, for example) To hedge a short straddle or strangle, you buy the legs further out, creating a condor or butterfly.
  6. Correct, it would increse his vega, but it would not decrease his gamma risk nearly as much as sticking to the front month strangle.