I trade covered calls, strangles. vertical spreads and iron codors -all for income. Normally if I have to give back twice the amount of premium I wii close the position. I would like to get an opinion if I can do something in a better way Please advise and comment
(Long) Straddles and strangles are, for the most part, one of the least of my favourite strategies- especially if the market is bullish. Stocks barely crash up- and when they do the implied doesn't really crash up either. If I could manage the margin requirements (my account is small but growing ) I'd rather sell a straddle during earnings- but what I'd really do is get into a butterfly if I have a strong directional bias (also the margin requirements aren't ruthless) So that SODA butterfly I entered into didnt work and I made a tiny loss. Had I been right I would've made almost 4-5 times as much. So the trade was good from a R/R perspective. There's quite a few posts in the thread I started about how the pros here trade- atticus, newwurldmn, sle, sonoma and others have given some really good inputs. Maybe check that out?
Take it this way: You are given two choices- Choice 1: you make $1 a day every day with a 99% probability. But can lose $100 with a 1% probability. The choice has worked continuously for the last 2 years (you did some backtesting) Choice 2: You lose a $1 everyday with a 99% probability. But win $100 with a 1% probability. This choice has yet to yield a profit. So pick a choice?
Would you prefer being short butterfly instead of being long iron butterfly? Both strategies have similar payouts and capital requirements so I wonder what are the reasons to favor one over the other.
Not a good idea. The IV contraction is going to whack the body more and move to strike will whack the other side. For the short wings, the IV contraction gain is smaller and the smaller premium doesn't offset the losses from the long strad until well outside a short strike. And then there's mlutiple leg slippage and commish. Diagonalized positions may be of interest in high month to moth skew situations but that's another story.
Because there are multiple variables involved (skew, strike width, amt of IV expansion, time until exp, time held, etc.), there isn't a one size fits all answer. But as a generalization, I doubt that you're going to net a 10% gain on a move to short strike one out. And since IC's a relatively low cost, 10% avg gain isn't a great result considering the slippage.
Because the probabilities over the long run matter. Remember you are taking the view that a big move will happen. There's no point buying volatility if you don't think the makret is mispricing the probability of a big move is there. Otherwise you are paying too much because options price in that Convexity (There's that big word again). Say earnings are pricing 5%. You think the stock is going to move 6%. That is not a compelling trade. If you think the stock is going to move 10%, it is very compelling. If you think the stock will move 6% and has a possibility of moving 10%, then it's compelling enough to do the trade. The market won't give you much for selling the 10% move risk. The market won't give you much for the 7% move risk. So why bother? Payouts in options are not like stocks. They are lumpy. Lots of small gains and a few big ones. Which side you are on during the many small gains and the few bigs ones culminate in your total pnl.
On the RIC, if the underlying moves up or down more than $5(or one strike) at closing it will make money, end of story. At that point, IV contraction doesn't matter, Convexity doesn't matter.