short strangle adjustment

Discussion in 'Options' started by dream_maker, May 19, 2008.

  1. hi,
    anyone excel in this field of doing short strangle adjustment? i am interested in this strategy but not too sure of what to do duirng an adjustment when the underlying approaches one of the wings.

    pls advise. thank you.

  2. dmo


    When you are long premium, every time you adjust your deltas you are locking in a profit. When you are short premium (as you are), every time you adjust your deltas your locking in a loss. So I'm not sure what kind of adjustment you have in mind.

    If you think it likely that the underlying will go back to halfway between your two strikes, or if you think it unlikely to go above or below the wings of the strangle, do nothing.

    If you think the current price is a new equilibrium point to which the underlying will keep returning, adjust your deltas to delta neutral.

    If you think the underlying will continue moving in its current direction, there are a number of things you can do - get long deltas for example (if it's approaching the upper wing, get short deltas if it's approaching the lower wing), or take off the strangle altogether.

    But there's no magic - when you're short strangles and the underlying moves, you're at risk.
  3. magicz


    you can always adjust either side if you think it is trending toward a particular direction. You can turn them into a calendar spread to hedge. I do this myself on my short strangle when the underlying trending toward one of my strike.
  4. 50_Bip


    You can adjust by turning the 'offending' strike into a ratio spread and hopefully not have to take a huge loss. Also, as another poster pointed out, you can adjust by turning your offending strike into a calendar. One other item to consider is taking off both strikes, repositioning at 1.5 times your original amount of contracts at delta neutral. That should keep you at break-even for the trade or hopefully give you some profit.

    Fiddy Bip
  5. hi everyone, thats definitely helpful. :) thank you
  6. MTE


    This is essentially a martingale system, which is ok if you have an unlimited amount of capital.

    I would never increase the position just for the sake of getting back to breakeven!