I've been a net seller of premium over the last decade and done just fine. Edge comes from experience, quantifying over/undervalue of iv, using price based entries and exits, outright long back month options etc. The criticisms of high risk/low reward are accurate, but in the end it is largely psychology which is the achilles heel. Many should not use the trade structure and there are times when only long dn should be on. Working with the considerable premium available with flys is nice but some cannot successfully go the adjustment route. I'm way late to this thread party lol. I suggest taking a month and reading optioncoach's thread for anyone going down this road. Have a great day.
Hi atticus, wondering if you'd be nice enough to clarify this part of your post in the Howard journal. When you say buy the fly and the calendar wouldn't that end up with a mix month fly so if XYZ is at 50 and you are bullish on stock, you'd buy a... +1 Jan 55c / -2 Jan 60c / +1 Feb 65 c since there is 65 calendar is embedded in the fly? unless you mean to embed either the 55/ or 60 striek calendar? One other thing,when you sell an index fly to trade dispersion do you mean sell an ATM index fly on let's say a broad index to mitigate the loss on your stock flise in case the market stays quiet till expiration?
Richard Rimes Ouch! That comment hurt, the three chord bit. When I was 18 I hitchhiked all over Canada and the USA sleeping in cars, empty trains and barns. I would pay for my supper by playing my six songs on my ukulele that I knew. All in the key of D. Had a great time, but had to keep moving as my entertainment payment for a supper and a place to sleep was very limited. This was in the 50´s. Now I´m 73 going 74, still got my ukulele in the office and still playing the same Key of D. I lay off for a while and forget all the songs and have to get my music books out again and relearn them. Over and over! I guess what hurts is that my trading is the same thing. The key of D in options. I read ATTICUS and I just did again and I have that darned piece running through my head and can´t turn it off. If he plays CHESS he must be a GRAND MASTER? I´m wondering if one cant actually get some software written to plug in different spreads as you go along, to mitigate risk as he does and let the software tell you the next move? There must be a way. The big question in my mind, is how much CASH do you end up at the end of such permutations? Like 2% of capital invested, or more after commissions. Is it worthwhile?
Oh lordy me Mushim Seeker, or whatever. You mean there are more of you guys out there? You understood enough of that Mandarin, or Orthodox Russian that ATTICUS wrote, to ask an intelligent question about it?
If it's a narrow book (only XYZ positions as stated) I would probably trade the put fly and the call calendar, so dissection is easier if you're running the positions for the first time. No, long gamma on the index fly; tight strikes to keep gamma relatively light. I would look to be close to flat gamma, netted. The position would be long a bit of theta and vega. Risk would be somewhat isolated to correlation. You could trade the spot-spread. Long XYZ, short index futures, say half your initial deltas. Short gamma in XYZ, long gamma in index, long the XYZ/index switch (short pseudo-dispersion). Net long gamma/theta/vega, but marginal on all. Correlation risk.
Atticus " The big question in my mind, is how much net profit do you have left, after all these permutations?" - 2% or risked capital invested? -