short strangles

Discussion in 'Options' started by larryb, Oct 20, 2003.

  1. larryb


    I have been trading short strangles 80 to 100 points out-of- the -money call & put options on the S&P 500 Future and would like to know if there are any other high flyer traders that want to share their experiences.
  2. With vix at 7 year lows, you might want to go light on selling strangles.
  3. omcate


    The low VIX is really a problem now.
    I am amazed by the number of contracts I need to write in order to earn a few thousand dollars per month.

    :( :( :(
    :mad: :mad: :mad:
  4. Since I assume you're using front month options, 80-100 points OTM per side seems excessive. Why not bring your short strikes in to say 40-60 points OTM and then hedge with farther OTM options (creating an iron condor). By doing so, you may be able to generate the same amount of premium without increasing your margin (and possibly reducing it), while simultaneously being covered in the event the worst case plays out. The only downside would be higher commissions. But if you're doing enough size, that shouldn't really matter.

    Just my 2 cents.
  5. I use short strangles on SP futures options as a major part of my trading program. This strategy has made money for me every month since I began using it in April.

    I use this strategy because it takes advantage of 2 inefficiencies: (1) all stock index options are generally overpriced. This means that, generally, implied volatilities exceed statistical volatilities by a significant amount. and (2) deep out of the money stock index puts in particular are greatly overvalued, as a result of their use by stock portfolio managers for portfolio insurance. There are many, many natural buyers for these in the wake of the October 1987 crash but no natural sellers.

    Prices for stock index options are too high, and especially so for deep OTM puts, so you want to sell them. And you don't want to include buying any such options as part of your strategy -- I'll discuss this more below when I go into risk management.

    This strategy is so effective that a number of fund managers use it exclusively to manage tens of millions of dollars and achieve very high reward to risk ratios is doing so. See,, and

    What is essential here is risk management. There have been a number of spectacular blowups resulting from traders who have employed short strangles -- the veritable Berings Bank was brought down by such a trader, and this is what happened to Niederhoffer and LTCM -- without also employing a method to cut their losses short. You are familiar with using stoplosses with your directional trading to cut losses short, and they are that much more important to use here. The problem is that the short strangle strategy can be so effective that traders are tempted to double down when the position moves against them instead of cut losses short, and when such a position finally doesn't come back it kills them fast as a result of the nonlinear equity curve afforded by options.

    Effective traders have used a number of means to control their risk management. Simply trading strangles instead of pure short puts means you have 2 legs to the position so that if one is hurting you the other is making money to help offset it. Ansbacher places GTC stops to cover all his options and places the stop at roughly 2-3 times the entry price. Oxeye uses, in their futures and options program, futures to delta hedge and keep the strangle delta neutral. This program has achieved incredible performance with a sharpe ratio of 1.7 -- at one point it was the number one performing money manager in the MAR database over a 5 year period.

    Other managers cover their position by buying deeper OTM options, but this pretty much kills the edge. Short strangles on stock index options is essentially volatility arbitrage, and is profitable because the options you sell are overpriced. But the deeper OTM you go the more overpriced they are, so that by buying the deeper OTM options you take away your edge. This strategy was employed by the Arcanum funds -- you can take a look at their performance on and see that they really have no edge. They steadily make small amounts of money for a time and then lose it all in infrequent bigger losses, and they have lost their investors.

    I highly recommend this strategy, in conjunction with effective risk management techniques.

    Happy trading!
  6. Deus Ex Machina,

    Very helpful info. One question, however. Have you considered that the reason you have made money with this strategy since April might be related to the fact that we have been in a declining vol environment since March, which has favored all vega negative strategies? As has been pointed out, if and when vol increases, the strategy might not fare as well. My point is that, though I agree the strategy is viable, I wouldn't be so cavalier about the risks based on the purported success of a few funds that have used it or a relatively brief number of months of personal experience.


  7. I know why the strategy's been profitable since April -- obviously these have been perfect conditions for it. There won't always be perfect conditions, that's for sure -- but with proper risk management it should be a profitable strategy as long as the phenomenon of overpriced options exists.

    With all due respect, these track records are substantial. Ansbacher's track record goes back to 1996. Oxeye was the top performing fund over the course of the 5 year period ending April of this year -- 2658% return over that period. Those periods encompass substantial market shocks -- Sep 11, 2001, Oct 1997, etc.
  8. ===========================================
    Interesting read on Oxeye Capital main managers
    :cool: ;
    Both have been trading equity & stock options since about 1970s & 1980s.

    Would agree OTM puts have been especially expensive in investment but not expensive in insurance context since March;
    dont sell them myself, buts its been good for lots of put sellers.

    Prefer trading the risk reward ratio of the following Oxeye Capital Management quote;
    ''there will be times when the market moves out of the ranges , we want to be long vol...
    buyers of options ''

    Amen, so be it .
    Love Learning,- Solomon trader king
    including the United kingdom
  9. Selling out of the money strangles on the OEX is the best strategy in my opinion. But, it's a rich mans game.

    I don't know what the margin requirements are now, but 10 years ago when I wanted to do this, my broker required $50,000 in my account per strangle.
    #10     Oct 22, 2003