"Perfect Option Position" - is it a fata morgana?

Discussion in 'Options' started by alassio, Sep 5, 2006.

  1. alassio


    Hi everybody

    Some time ago I have read here the discussion about the "perfect option position":
    A butterfly in the front month combined with a wrangle in the back month

    This is supposed to be "perfect" because it combines limited risk with unlimited profit potential and positive time decay.
    The position should be possible to setup as delta neutral, positive vega (from the backmonth) and positive theta.

    However, as a retail trader, in the current vol/skew environment, at least for index options I seem not able to find such a setup, which maintains positive theta.
    Does somebody really trade these beasts or is it only a fata morgana?

    Are there other positions that combine positive vega with positive theta?

    Thanks for your advice, alassio
  2. Ah yes, Maverick's flying wrangle. I remember it well.

    You can be sure you're broker will be happy with you trading all of those legs:

    10 legs for a 1 lot flying wrangle :)

    I'm not sure Maverick himself trades them these days but you can certainly take some of the concepts from the flying wrangle and apply it to your own positions.

    As you noted, the main characteristics were long theta and long vega. Simplistically, using the fly to pay for the wrangle. You have to decide whether market conditions are suitable to put on such a position and/or whether it is desireable. Certainly, owning a reduced cost wrangle in one of the back months is very nice if you can get it.

    There are many other ways of achieving these greek exposures. The simplest are time flies/straddle strangle swaps, double diagonals etc.

    Short gamma/long theta in the front month. Long vega in the back month. Adjust ratios to match your desired exposure e.g. you could end up with a diagonalized wrangle.

    Good luck.

  3. alassio


    Currently back month vols are higher than front month (at least in DAX index options) and I am having difficulties getting positive theta with additional long wings.

    My market expectiation is some sideways movement with a potential large sell off in the coming weeks. So a delta neutral long theta and long vega position would be fine to have sitting and wait.
    Any recommendation which kind of time spread could fit the expectation?