Hedging with the underlying locks you into negative replication error if stat vol is greater than vol you shorted. Be careful if dislocations in your underlying happen with any regularity. If so, your hedge will be the source of one big headache if you're on the wrong side of the move. Consider trading a fly instead of the short straddle. Over many trades, the fly will almost always yield a superior risk-reward profile compared to a short straddle unless you've got the Midas touch. As another poster suggested, paper trade until you learn more. If you have to play, become Captain One-Lot on something with lots of liquidity.
Lucky? I'm going to assume that you mean the priice stays between the strike and the underlying because it would be tough to stay "inbetween the strike price" of a straddle 1) What happens if your stop order gets a bad fill because the underlying gapped? 2) If you hedge a breached break even, what happens if the underlying reverses big time and crosses the strike? Now you have a 100 delta UL whacking you on top of that side's option gaining in value which is a loss to you. PS If you don't know these things, you shouldn't be trading nekkid
looks like you are thinking of daytrading this thing? i think the slippage will be a big problem. The only reason to open a short straddle is a play on high IV, waiting for theta decay isnt really a good idea.
' Gotta agree, especially in terms of trading the fly versus the short straddle. Going straight up short straddles when you lack knowledge about options is a very quick way to lose a lot of money. The fly will give you similar exposure (calculate the break evens at expiration to see for yourself) while giving you a clearly delineated worst case scenario (your debit). Now all you need to do is to figure out how to put on flies with equidistant wings for a credit (vertical not horizontal [in the same month not across months]).
@Carl K, I am doing it. sonoma, Thanks for your reply. @spindr0 You are right.we can't presume the stop order wont get bad fill. If you hedge a breached break even, what happens if the underlying reverses big time and crosses the strike? Now you have a 100 delta UL whacking you on top of that side's option gaining in value which is a loss to you. yes you are right. if stop order cross the strike, i will be in loss. i could avoid it by tighter stop loss for stop order which prevents UL from cross the strike.I think hedging with underlying requires more level of monitoring than with options. @butterflykondor Gotta agree, especially in terms of trading the fly versus the short straddle. butterfly positon?.
It's a bit the cart in front of the horse but when you are a bit more familiar with options, take a look at gamma scalping - assuming that nekkid straddles is still your MO. While not a noob topic, it does provide a degree of hedging.
What are your guys' thoughts on short strangles? - indexes only SPY, EFA, EEM - front month only, opened a day or two after previous expiration - about 6-10% OTM on both sides depending on the instrument and premium levels - generally delta neutral at the open but usually not exactly depending on market technicals Been trading them for over a year and have been making money despite a couple losing months (May10 rolled out to further OTM puts, Oct 10 let calls expire in the money). And if I can ask another... what about long time series (ie sell Nov then Dec ATM straddle, buy Jan ATM straddle)? Great boards. Thanks.
If I'm reading your question correctly, you've got the equivalent of 2 call or put calendars. It's a fine position, if that's the position you want.