Simple, Highly Profitable & Safe... Strangle-to-Collar

Discussion in 'Options' started by jones247, Feb 12, 2008.

  1. I'd like to share a technique that I've been analyzing for quite a while. I was apprehensive because of how simple it really is. I've been deluded into believing that the only way one could be consistently profitable in the options market is to develop a highly complex and intricate trading strategy. I've experimented with combining several spreads (i.e. Iron Condor with a call and put backspread). I've tested martingale, scaling and pyramiding. I've implemented several TA indicators for timing and direction. I've considered the HV relative to the IV and the skew...etc...etc...etc...

    However, it all really comes down to a simple technique that trumphs them all...

    OTM short strangle, with a "synthetic" collar as an exit strategy if the strike price on any leg is reached.

    Worse case - breakeven...

    Best case - 20+% return per month (assuming futures options)

    Your thoughts... Tell me where I'm "off-base"...

  2. Sashe


    Are you putting on the synthetic collar at the same time when you sell the OTM strangle or when a leg is in jeopardy?
    Can you give a real trading example/scenario?
  3. spindr0


    When dealing with naked strangles, there is no such thing as break even is the worst case scenario.
  4. Only when the strike price is reached by the market price (when a leg is in jeopardy).
  5. You're correct if you do not protect yourself with a collar. However, the collar (long the asset & long protective put) or (short the asset & long protective call) mitigates a loss on the given leg of the short otm strangle...
  6. At this point the IC is at a loss, so how does any new position turn a loss into the worst case scenario of break even?
  7. Lets break it down assuming you added long stock and short put.

    Short strangle is -p -c

    You are saying you add long underlying +S
    and long put +p?

    Without getting into the strike selection you are left with a bear put spread assuming long put is within the strikes or a bull put spread if long put is at a lower strike.

    Assume it is a bear put spread and stock tanks after making adjustment. You exercise long put to cover stock, you are still short a put.

    Assume it is a bull put spread and stock tanks after making adjustment. Exercise long put to cover stock and short put is still naked.

    Assume stock rallies hard after making adjustment. You have stock plus -c which is covered call so profit is capped to upside. Cost of put eats into strangle premium so you might have some profit to upside.

    I think adding long stock and long put only has potential if stock rallies strong to short call and then you add the stock and long put. If it keeps rallying the position might have a tiny gain left.

    I cannot know for sure because I am just looking at the big picture and not with any realistic prices.

    All of this depends 100% on when you add the stock and long put and what you sold the strangle for and time to expiration and volatility changes. With so many variables I doubt you can claim a risk free adjustment or position with worst case scenario a breakeven.

    If all you could do is one simply adjustment to turn a losing position into a profit, then there would be no risk to begin with, and hence no return greater than the risk-free rate.

    I am afraid the jury is still out on this hypothetical suggestion. I think you will see it better if you paper trade one with real prices but I doubt you will see as good a result as you expect.

    Assume you add long stock and short put and market tanks instead of keep running higher and you get whipsawed around?
  8. spindr0


    [When dealing with naked strangles, there is no such thing as break even is the worst case scenario.
    I hate to parse words but mitigate and risk free mean two different things.

    If you start with a short strangle (- P - C) and the underlying drops and you add "long the asset & long protective put" (+S + P), you end up with a covered call. There's no way that the long stock is protected. The only way that the long stock is put protected is if you buy two puts, ending in a collar. In order to be "risk free", you'll have to buy the two puts long before the strike is reached since their cost will come out of the premium received from the strangle. If you buy the stock before the strike is reached, you'll then have downside risk on the stock until the put strike is reached.

    At this point, this is all an exercise in futility because it's not clear that you understand the strategy. If you want everyone to be on the same page, post an initial strangle with month, strike and respective premiums and include the specific adjustments that you would make if the underlying moved toward a strike.
  9. Very well... I will post an example later today on the e-mini, unless someone prefers another asset. The biggest challenge will be the relative cost of the protective put in the collar relative to the premium received for the call in the original otm strangle. To overcome this, I would employ a ratio spread (i.e. 1 long put near-the-money & 3 short puts way otm). Of course, in the unlikely scenario is the underlying asset precipitously drops, then I have to employee a synthethic collar on puts. Sorry if this is getting a bit confusing...

  10. Prevail

    Prevail Guest

    if he could buy the atm protective call or put for the premium he could receive for the strangle he would be right.

    having a short put barrier hit he would not go long stock but short stock. then add the long atm call to complete the collar. the long call premium subtracted from the strangle premium, will then give the p&l line.

    the ratio is interesting but would provide a loss zone at expiration.

    interesting exit idea but if you can set up the collar to breakeven then you can simply buy back the short leg for breakeven as well.

    remember gang, if no one posted trading ideas we would have nothing to talk about.
    #10     Feb 13, 2008