Although until I open a deep discount account somewhere, I'm probably gonna stick to conservative stock picks. Right now I'm just buying fat dividend payers, and holding them until things calm down. Glad I wasn't short anything this morning. Sheeesh!! :eek:
Instead of using the underlying for your short term trades try selling either a near month put or call against the straddle or strangle. This puts time decay on your side(big time if you use 6 mos. plus staddle). Keep repeating each month until a big run in one direction or volitility spike takes you out with a nice return.
Doubter, That could work provided the difference in IV (bias) between the two months is substantial enough to protect you against a vol implosion. If bias is not big enough and xyz makes big up move and you sell a call against the straddle you will get whacked due to short gamma on the call calendar. Bottom line with this strategy is the IV differential -i.e. your bias
CA- Right! Only buy very cheap straddles(low volitility) then start letting the time decay start reducing that original cost until a big move or a volitility spike gives you a nice out. These are very consistent if done right. Even if the underlying doesn't move much the time decay on the short will lower the original cost pretty fast. I use only very liquid options for this. I search for options near the bottom of their IV range that are liquid.
There are two big problems with most "exotic" options strategies, for the commoner. One is option commission. I'm probably like most people, that opened an account with a big retailer. It would cost around $80 to set up a 4-sided position. Yes, I know about IB and others now... but it will be a few months before I unwind everything. The other is options approval. You need a lotta moolah to write short puts and calls.
div poacher-- i actually used to do this back in the day when there was good volatility in expensive nasdaq stocks. i'm not quite sure why i stopped (i stopped last summer), and i'm also a bit foggy on the details as i didn't do it for very long, but i do seem to recall it being better to have a good idea of the trend of the stock, and buying the cheaper options opposite the trend. in my case, i was doing this for a strong stock, and essentially made a market in the stock. this way, i could essentially buy dips constantly and stay hedged, and sell out my long stock at a pre-defined level, say 0.10 above, depending on how volatile the stock was acting. it did take a lot of effort, which is maybe why i stopped, but maybe if you have a mechanical trading system to make the market for you, it would be easier. i wish more people would use this strategy. it makes a lot of sense, makes good use of options, and anything to up the options volume would be a good thing for us all. i also recall thinking about using some sexier options combinations to create short volatility hedges, which was appropriate last summer but isn't such a good idea right now with the low volatility of the overall mkt. i.e. i could sell a call as a long hedge and buy a cheaper call to hedge the first one...but i never actually tried any of the fancier stuff... PM me if you want details...i'll try to remember as best i can. peace PS - if you are retail, i'd strongly recommend opening an IB account. besides cheap rates they are probably the quickest when it comes to applying for more options priviledges, as there is no paper and it is all done online..
Ahhh, uptrends. Back in the days when people were saying stocks were no riskier than bonds.... That earnings didn't matter... Dividends didn't matter... It really happened, didn't it? Or am I imagining things? Anyway, I agree you could use a strong trend and buy cheap options out of the money as your hedge. The problem now is, do you really trust the downtrends? All trends end somewhere, and stocks have been whacked pretty hard the last few years. That's why I've been mulling over strategies for trendless (flat trend) stocks. Short options put time decay in your favor. But then, you gotta have the approval to make them....
Trajan, Good to see your active and posting, I like your posts. I'm not sure if a long vol option position is always a poor choice. I'd tend to think that there is a time and place for everything. If you buy a three month option which is in its 10th lowest IV percentile and expect a surge, why not just buy the straddle and gamma scalp it? a good trader would know how to deal with false deltas,ddeltadvol, up and down gamma and under/overhedge accordingly. One needs to be good at predicting 'chop' though, and not direction, which would help the rebalancing of the deltas. I've found some statistically reliable methods of predicting chop and when it would be good to buy undervalued options. Just buying a straddle and letting it sit is a bad idea, however, imho. I've always wondered how the hell McMillan does it, maybe that's why he's out there selling his stuff. Unless you can sell other options against it, like some posters have suggested, but then again, gamma can get you easy. Maverick