Is this a neutral strangle?

Discussion in 'Options' started by Twinsen, Mar 1, 2013.

  1. Twinsen

    Twinsen

    Hello,

    Let's say GDX is at 35, I buy a month long ITM strangle - call at 30 and put at 40. For example paying $1000 for each leg. And the legs are nearly with equal intrinsic values and delta.

    So can this trade stay neutral (~ $2000) up to the expiration day? Will one leg equally cover the loss of the other leg?

    Or is it possible to lose the whole $2000 investment or significant part of it?
     
  2. Model it on a piece of paper. Start with the expiry scenario and see what you get.
     
  3. Think about what happens if the underlying finishes at 35.
     
  4. Why choose the guts (ITM)? The difference between the ITM and OTM is the box arbitrage. Stick with the OTM.

    A $2,000 guts strangle is $1,000 for the OTM strangle. You're risking $1k.
     
  5. Twinsen

    Twinsen

    I asked if I lose this strangle because the idea was to sell OTM weekly short puts and calls. And then sell the strangle for the same amount I bought it, but I am not sure if it would be possible or not.

    Though I do not like this strategy because if market falls or rises quickly far behind short option there will be a loss on other leg. See the picture attached with the rules.
     
  6. Buying ITM strangle is the same from risk stand point as buying OTM strangle with the same strikes. However, in case of ITM one may think that the potential loss is smaller if that loss is measured against the intrinsic value of the strangle.

    This is a strategy advocated by one Terry Allen (Terry's Tips).
    He probably does not understand options price parity or tries to appeal to some emotional insecurities of his customers or both.
     
  7. It's comical. There is so much wrong with this STUDD strategy that I don't know where to start. Buy an ITM strangle, but please don't assume it's somehow advantageous. They're arb-equivalent.
     
  8. Twinsen

    Twinsen

    I would not say that OTM strangle and ITM strangles are the same if stock does not move OTM will decay faster than deep ITM.
     

  9. Did you model it in excel yet?
     
  10. metameta

    metameta

    broker is a winner.
     
    #10     Mar 5, 2013