I short a straddle ATM yesterday. Now the call is 5 pts ITM and I'm slightly in the red as the gain in the put is not completely offsetting the loss in the call. Is this normal and one should let the time decay work itself out toward expiration, provided the underlying is still in the profitable range?
Need more information, but the decay goes to nil once the position is pushing >75 deltas. Please post the particulars.
PLug the legs of the straddle in an option calculator and study the GREEK movements of each. The gamma/delta gain of the short ITM option will outpace the theta, delta loss of the now short OTM option so it will appear to be a loss on paper even if the stock is still within your profit zone with time left to expiration. Time decay and IV changes affect the prices. Only wait it out if you expect the stock to sit still or stay in the range, or if you ar eplaying and IV collapse. Theta will kick in more but not as much if the stock is moving away from the strikes.
Just a heads up, riskarb is going to say something similar to what I just said more or less and expound some more with one key difference. Mine was in English LOL LOL LOL......
Here's the setup: OIH underlying trading at 160 Short OIH May 160 Call @ 5.5 Short OIH May 160 Put @ 5.2
hahaha OC. You're only 5 handles itm and the delta position is still <50, at which point the thetas "kink" and decay is negligible.. I'd watch oil closely, but no reason to pull the plug here. Straddle is short 35 deltas, equivalent to 35 shares in OIH. The good news is that you're not accumulating [-] gammas or vegas at this point[in a rally] -- bad news, thetas diminish as well.
If the straddle moves out of profitable range to the upside, is it wise to cut lost on the short call and just keep the short put?
Imagine this scenario, you cut the loss on the short call and leave the put, the stock then reverses and moves down sharply and you take a loss on the put now was well as the call in both directions. I think it might lead you to get whipsawed pretty bad. Either in or out is the best way to play such a risky naked position. Or ask riskarb about converting it to an Iron Butterfly
I don't know that I see OIH IV dropping too much in the near future. Converting to an IB doesn't seem all that lucrative.
i'm just trying to learn here, so this is more a question than a suggestion (since i'm in NO position to suggest anything as a newb). would it make any sense to increase the ratio by selling the 155 puts, for example (or even the 150 puts); since they'll depreciate @ a higher % than the 160 calls will appreciate and, being so far otm and this being a basket which isn't going to move against you 15% in a day, you'd have plenty of time to adjust if the OIH starts to breakdown. i realize that this doesn't give you the same protection as buying a 170 or 175 call, but, unlike that option, it's not a potential wasting asset. that and this doesn't have the same risk profile as an individual stock- especially to the downside (well, unless iran sacks their lunatic leader and replaces him with a jew- that might do it!). anyway, am i completely off base here? if so, where does my logic err? keep in mind, my idea is based upon the assumption that he'd prefer not to close the position right now.