Name of this strategy and risk, please

Discussion in 'Options' started by torontoman, Sep 24, 2009.

  1. IBM trading at 100.

    Sell 1 Oct 99 put
    buy 2 December 98 put
    Sell 1 Oct 101 call
    buy 2 December 102 call

    Thanks in advance
     
  2. Diagonal backspread.

    Why does it matter what it's called?

    Risk is an IV collapse and your long options shrink in value.

    Mark
     
  3. Wellllll, the olympic judges get a bit picky if you don't label your routine properly :)
     
  4. those damned Olympics had better wind up in Rio and not in my town!

    Mark
     
  5. mrwoody

    mrwoody

    sorry for the naive question, but what is an
    IV collapse? where can I find information about this?

    Thanks!
     
  6. MTE

    MTE

    A fall in implied volatility.
     
  7. Since it is a long vega position, drop in IV will hurt it.

    Open attached chart to see the position vega,

    i.e. it shows total vega as $56.55, what it means is that for every 1% drop in IV ( i.e. from 35% to 34% ), the position loses $56.66.
     
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  8. The danger is that - even though you get a good result and your short-term options expire worthless, it's possible that your long options will lose more than you gain.

    The market price of those December options depends to a great deal on implied volatility. OK, that means nothing to you now, but if the option prices drop by much more than expected from time decay, your position can lose money.

    There's lots to read about, so don't go after this single topic as if it's the answer to understanding options.

    Mark
    http://blog.mdwoptions.com
     
  9. First off IBM has 5 dollar wide strikes so you cannot construct a spread 1 dollar wide on IBM. IBM is currently trading at around 120 bucks.
    The spread your have described is called an iron condor. This spread is sold for a credit. I constructed a trade as close as I could to what you described on IBM.
    You have three weeks till expiration in October. But I usually take off these kinds of trades the Friday before expiration.
    This is the risk graph at expiration. The max loss from this spread is 343.00 plus commissions.
    [​IMG]
    This is the risk graph one week before expiration.
    [​IMG]
    Now IBM is not a high volatility stock. But it still has a little bit of volatility left in it from when the world came to an end last year. I could loss 3 points of volatility, maybe. What will happen? You get a little bonus, this trade is helped by falling volatility that's vega.
    [​IMG]
    Earlier this year was was able to get out of these trades in a matter of days with my profits because of this.
     
  10. So a double dagonal backspread is equivalent to an iron condor?

    LOLOL. I wonder how the East German judge would score that?

    :)
     
    #10     Sep 24, 2009