Yeah what you are missing is that you are looking at the After Hours range not the actual trading day. Walt that is a major mistake when assessing moves in the ES (looking at afterhours quotes). You did not even look at the ES at all today before making up a hypothetical risk-free trade adjustment idea?!?!?!! Todays range was like 19 points or so.
Yeah, I'd say. That's the range on the 2/13/08 AH session. The day session range was nearly 20 points. Look at the atm straddle as the implied distribution of the underlying. The Mar ATM straddle is ~85.
Walt, I just read this thread, and many good comments were already made to your observations. I think your effort to find an "edge" is the right type of effort one should do. The "edge" does not require complicated things. Once you will find your key, it will be simple to explain and you will find it very intuitive as well. Finding the edge does not necessarily require skillful manipulation of options, but the lack of it may hinder from finding the edge as one may stumble on it without realizing it. I would also add these to readers (this may not apply to Walt): (1) in my view one should never be naked when writing options unless crazy, wealthy or does not care losing money, (2) You did not indicate in your first post as well as after other comments the placement of the put strike. The order of strikes matters a lot. (3) I would suggest that one plays with synthetics a lot, as well as other transformations so that it becomes second nature. (4) I think that you are close in finding an edge. As a matter of fact one of the various things I do regarding the management of ICs is something that have some close elements in philosophy to what you described (sorry I cannot tell more here). (5) One should "master" the underlying. (6) One should avoid selling cheap options. I usually hoard a lot of them, because if storm winds blow, they allow me to fly. They are also useful for many other little things. One should pay attention to the details---they do matter in options trading.
Oops... how embarassing... sorry for my carelessness. I should have known better, as the ATR (10) was above 31...
Yeah I knew it was a harmless mistake so I was just razzing you, no offense intended... As for your ideas, the best way is to mvoe from theoretical to actual and put on a paper strangle and make the adjustments if one side is threatened. It would be best if you could do it on an analyzer to see net P&L.
Thanks for the advice Riskfreetrading... unfortuneately, most of the points you made were a bit too esoteric for me. Perhaps someone can "shed some light" on the various points on that post. I believe without an edge, then this is all a game of "blind gambling". Although selling naked options seem risky, and it indeed is risky without proper money management, individuals such as Max Ansbacher and James Cordier & Michael Gross have been consistently VERY profitable selling naked options in the futures market. Perhaps this strategy I proposed in this thread would be best suited for the soft commodities (i.e. coffee, cocoa, wheat, soybean) and financial commodities (i.e. 10-yr treasury note & federal funds rate). I have the utmost respect for Dr. Nassim Taleb; although I'm still developing my understanding of VAR and skew on the IV and risk. I understand the potential harm of selling deep otm options, and I understand why you would hoard them. Nonetheless, I believe that there are ways to mitigate an adverse impact if the market turns against your short positions. Others have implied that better hedging/mitigating strategies exist beyond the ones I suggested. It would be great if someone was willing to share and discuss such strategies. Hopefully we're here to help each other in a common purpose to mutually enhance our trading experience. Walt
If you do want to test this out, consider buying deep OTM long options to go with the short strangle so that your risk is always bounded somehow. If you find that your adjustment suggestions work for you to minimize risk on adverse moves (you will not get to $0 risk or break even as worst case) then those extra long wings can still help you on those major moves. Reduces your net credit but gives a little more safety over the naked strangle. map it out and see..
I appreciate the recommendation, Optioncoach... I suppose that someday a safety net, such as the wings to cap my losses, will come in handy...
Walt, I did not mean in my post to be negative. I rather want to say that you seem to have the right temperament and attitude to be successful in options trading. Continue to question everything (even if what you question is right) as this will strengthen your understanding and skills. An edge does not need to be necessarily a mathematically/experimentally proven edge. It could also be that you are or will be better than the next fellow playing a similar game. If view options trading as "gambling", there are differences. In this case you design the system and you set your own rules as opposed to gambling in a casino where you are subject to their rules. Even if you were to go it with the probability/gambling edge (in terms of designing your system) it is still not really gambling as you are offering a service to the finance services. Remember, options that you write may be used by others to hedge which is useful to society. There is some value here, but your business will need to be managed as a business even if sometimes you may have to ran it as a "gambling" house. Probably you should rather view it as an insurance business (if you are a net writer of premium). In my reference to long premium, I did not mean that you should be overall long premium. In fact I think you should not, because we know that the general public is general long premium and the professionals are predominantly short premium. What I was trying to say is that you should buy those 1cent to 2cent options to protect yourself. Take their cost from your profits, and you will feel/sleep well. There is also the other protection that the long options offer. Imagine your broker decides to change his margin. It is the broker's right to do so. If your margin is not there, they will liquidate your position at the worse price and possibly even with a huge bid/ask price. Your position can profitable if held to expiration. But if the brokers close it, you would lose your position, potential profits, and would close it at a bad/negative results. The point is that you should make sure you are the commander of your ship/destiny, and that you make the calls and no one else. Control is priceless! Lastly, I do not think you should abandon your idea. Push it further. If it does not work, another idea will pop out. Your idea created debate. That is good, and a sign that greater ideas will be coming. What I and others say, while are written to help and are genuine, they remain opinions/views etc. So do not hesitate to pound on them and questioned them (even if they are right). Bottom line will be that you will make money. If I have to bet, I think you are or will make money.
Optioncoach is right. In addition, as I indicated in the other post, the cheap OTM options are very useful against margin changes in nonnormal market conditions. We know that options in such climate go to extremes in prices, and brokers change their margins. A naked position is likley to be closed in such environment. But if you believe you are right and accept the potential dangers, who am I (or others) to tell you to do otherwise? Do what you think is right! We just want you to be safe and wealthy!