Short straddles - Risk management

Discussion in 'Options' started by jebaanandhan, Oct 15, 2010.

  1. Ya basically a calendar call and a calendar put.

    I like to be long theta. The short strangles and calendars accomplish this. Though the calendars make me long vega which is fine assuming I enter the trade when vol is "low".

    Thanks for the replies. Any other good long theta strategies for me to consider?
     
    #21     Oct 21, 2010
  2. sonoma

    sonoma

    You may not be viewing your trade in this way, but many traders think that buying a same strike put and call calendar somehow places their inventory in a particularly favorable position. My previous post was to clarify that such "dual" calendar purchase is synthetically either 2 call calendars or 2 put calendars. Again, there's nothing wrong with such a trade, it's just that you need to want 2x calendars instead of 1x and not be misled thinking that a put and call calendar will result in anything other than the p/l of 2 same-strike call or put calendars.
     
    #22     Oct 22, 2010
  3. Thanks again for the reply sonoma.

    I see what you're saying now. I understand the P/L of the position and how it will lose value as the underlying moves futher in or out of the money. I guess I was worried that there would be some kind of difference depending on whether the position was in vs. out of the money.

    So are you saying that no matter how far in or out of the money the position moves, the P/Ls of the calls vs. puts will be identical at all times?
     
    #23     Oct 23, 2010
  4. sonoma

    sonoma

    Your query of whether the marks will be "identical" during the trade has to be answered with a bit of qualification because issues like liquidity and transient IV imbalances can get in the way. Nevertheless, for the level of discussion we're having, yes, they will be so similar as to make them equivalent. Of course, if you're adding a calendar to your inventory and you have a delta bias, you should look to trade the OTM because you'll usually see less slippage than with the ITM.
     
    #24     Oct 23, 2010
  5. ...here is a link to paul's site, lots of free stuff...

    http://tradingoptionsvisually.com/
     
    #25     Mar 1, 2011
  6. Care to explain how hedging with the underlying assuming HV is greater than the IV you shorted leads to a negative replication error?
     
    #26     Mar 1, 2011
  7. sonoma

    sonoma

    I'm not exactly sure what you're asking, but if you're questioning the theory, it's simply the way options are structured. Nothing mysterious about it, it's just the way it is. If you're looking for an example, all you need do is find a period of time that stat vol is greater than implied and do the arithmetic. An inconvenient truth is that you can end up with a negative p/l even if realized vol ends up less than implied.
     
    #27     Mar 1, 2011
  8. tomk96

    tomk96

    or you can still do very well because you made your delta hedges. and if you are getting decay, it comes down to how that is performing vs your hedging.
     
    #28     Mar 1, 2011
  9. sonoma

    sonoma

    Ageed. I was just pointing out more explicitly that the opposite of statvol>implied does not necessarily imply a + p/l. It's just one of several conditions that have to work in your favor.
     
    #29     Mar 2, 2011