High volatility Strangles

Discussion in 'Options' started by ptrjon, Dec 23, 2008.

  1. ptrjon


    2 months ago I began selling strangles, similar to a straddle, with the options both being in the money. My results are so-so considering the high volatility, I am down about 5%. Any thoughts on this strategy? Comments from people using similar strategies?

    I've been investing in a brokerage account for about a full year now, with limited experience in options. I understand that it's a learning process, and am glad that I'm beating the market despite my losses, and hope to continue to learn and grow from my experience.

    thanks for your help.
  2. Thoughts on this strategy? All I can say is you got started at the right time. Had you begun any earlier, you never would have survived. With this volatility, the normal expectation for a strangle seller would be for you to have gone broke several times.

    Suggestion: Thank your lucky stars and instead of selling strangles, consider the much safer (yes, less rewarding) iron condor strategy. This is not 'safe' but it's much safer.

    FYI: Selling ITM strangles is equivalent to selling OTM strangles with the same strike prices.

  3. Hi Mark,

    I posted the following question on another thread; however, I think it would be more appropriate on this thread.

    My question is.... which do you believe has a better risk/reward probability potential: (a) iron condor or (b) calendar strangle?


  4. rickf


    I daresay Iron Condors will kill you in the current market --- at least in the crazy vol we saw this summer and fall. Unless you've got a high risk tolerance and stomach for big swings, I think it'd be hard if not impossible to run a good IC position these days unless you're making intraday, or even intra-hour changes to your strikes.

    The last IC I ran was on the RUT in (I think) Sept into October. Barely 2 weeks into a 5 week position I had closed the entire spread because my short strike on the put was breached by a few points. Even though I wanted to give it a little time to work, given I had (IIRC) an 80 or so point 'cushion' to the downside, that sudden move, so quickly, did not sit well with me. So I closed the entire position. What did my IC do? Bounced back up to my original entry price, crept a bit higher, than plunged thru my put spread and beyond.

    I'm glad I got out when I did - I didn't have the stomach or inclination to trade "ranged" strategies, and the price of being long a strangle/straddle with the VIX so high was a horrible R/R in my view.
  5. I disagree. ICs look pretty good right now (I reserve the right to completely change my mind if the market has another Sep/Oct like decline, though). Calendars, on the other hand, are taking a beating in current market conditions.

    July was a little rough, too. But you didn't expect to make money with ICs 12 months out of the year, did you?
  6. ptrjon


    Iron Condors, in my opinion, are not worth it because of:

    way too many commissions, their win-a-little or lose-a-lot nature, which is somewhat related to the risk of any uncovered option position.

    When i speak of ITM strangles, I'm talking about selling a 40 call and a 50 put, for the same month, on a security at 45.
  7. Div_Arb


    Prudent risk management is the key to a succesful iron condor program. If you can manage the risk properly, ICs can be very consistent and profitable.

  8. 1) Commissions should not be a factor in today's world. If they are, then you are using the wrong broker.

    2) 'Win a little' may be your methodology. If you sell, a 10-point spread for $3 or $4, the win is not so little and the maximum loss is not that large (in comparison). Also, good risk management means never taking that maximum loss.

    3) But you should trade positions that suit your comfort zone.

  9. Just read an interesting article about IC's and short straddles. To make a long story short, short straddles (iron butterflies) are most successful when VIX is between 18 and 25. The author's study ran from 1993 to the present. He also mentioned that IC's should be legged into during higher volatility situations. Basically, once the underlying breaches a support area, then the trader would enter his bull put spreads OTM or deep OTM--based on your tolerance and monetary goal. The opposite would occur when breakout is through resistance. Because of the high IV, one can get a pretty good credit deep OTM. Obviously, the theory here is contrarian. Unfortunately, I traded Iron Butterflies during the September and October period (sat out November). I didn't receive enough premium; my breakeven points were too close to the point of entry. Even short straddles didn't offer enough premium. Plus, even if you have an iron stomach, the typical bouncebacks and follow-throughs didn't occur--which someone here already mentioned. Taking a look at Iron Condors in September and October--a loss would still be incurred, but compared to the buy-and hold of the SPY during the same period, the IC lost LESS money. I forgot where I read the study, for I was just Googling "Iron Condors" and reading.

    Given that the VIX is in a downward trend (like that means anything), then legged in IC's make sense here. Also, bull put spreads or bear call spreads alone make sense, using the above strategy.
  10. zdreg


    warren buffet is in the insurance business.
    you are not
    #10     Dec 25, 2008