Straddles Profit Potential

Discussion in 'Options' started by jgiasi, Apr 29, 2009.

  1. The B/A spread is tight on some options, such as the SPYs; however, point taken, as most volatile options will have a wide b/a spread. Perhaps a good "middle ground compromise" is both...

    In other words, enter a traditional straddle (call & put at the same strike price). After the 1st move long or short, such as the equivalence of a day's range or the distance between strike prices, then gamma scalp to remain delta neutral and lock in profits. At this point liquidate the winning option leg and replace it with the underlying stock. Thereafter, it remains a synthetic straddle on which you can continue to gamma scalp, or close out completely if the profit target is reached...

    This may be the best of both worlds...


     
    #11     Sep 25, 2009
  2. Walt.

    You are talking 'gamma scalping' to someone who doesn't know what a straddle is - other than its definition.

    Jack,

    Same thing regarding IV.

    This question truly sounds as if it's a school project and not the question of a rookie trader.

    Mark
     
    #12     Sep 25, 2009
  3. spindr0

    spindr0

    I'm no expert - just sharing the building block steps that I've taken :)

    When I first tried gamma scalping, I went with the straddle. Now I go with stock and 1 option leg . Apart from the aforementioned B/A issue, there's also the complication of 3 legs versus 2. Simpler is always better.

    Then there's the issue of available delta. Suppose I start neutral at 50/-50, it moves to 70/-30 and I need to buy 245 delta to get back to neutral. Either I have to use 3 calls and 1 put or 3 calls and some stock. It takes a few seconds more to evaluate 2 moving targets. Either way, it's a problem in a fast market... even in a normal market when you have an underlying that can reverse 50 cts in a blink. If you need 245 delta, you simply buy 245 shares. Period. It takes seconds. Done.

    Gamma scalping is no road to riches. An awful lot of small trades to make up the inital slippage and keep pace with subsequent time decay, let alone get ahead. Where it's interesting is pre-earnings IV expansion (2-4 weeks), offsetting decay to some degree. Closing before the EA may be appropriate. Adjusting to something else just before the EA is another possibility. And sometimes you hold through the EA and get lucky with a move like RIMM this week :)

    And sometimes, you're just flat out, dead wrong.
     
    #13     Sep 26, 2009