Straddles that are ITM

Discussion in 'Options' started by falcon, Sep 28, 2011.

  1. falcon

    falcon

    Writing straddles that are ITM then day trading them back and forth. Before expiration perform the strategy below:

    XYZ at $20

    Short 10 xyz calls at 19

    Short 10 xyz puts at 21

    The loss between the 2 strikes is $2 but you can take more than $2 in credit which turns it into a profit.

    Can I get this strategy critiqued please.
     
  2. You mean strangles then? Wait, no, that's both puts and calls ITM.

    Wait, hold on, I am full of sh1t.
     
  3. Your option numbers dont make sense.

    Your 10 call is $10 ITM, and should be valued roughly $10 higher than the 10 puts.

    In your example, your synthetic forward is $9, with the actual underlying at $20--not anywhere close to realworld values
     
  4. MTE

    MTE

    What you are forgetting is that if the stock expires between the strikes then this strangle (not straddle as you refer to it...actually it's called a gut strangle since both options are ITM) would be worth exactly $2, so your maximum profit in this strategy is the amount above $2 that you receive when you sell it. In other words, your max profit is equal to time value, which is the same as selling a normal strangle, where the options are OTM (i.e. 19 put and 21 call).
     
  5. falcon

    falcon

    Exactly. If I receive more than $2 which is very possible then it works right.

    What else an I missing?
     
  6. Your ITM guts strangle is equivalent to the normal OTM strangle, eg:

    -19c - 21p = -19p - 21c

    Anything you do to one side can be done to the other. As with all option strategies, if the underlying cooperates, you can make more money trading the components than holding the static position. If it doesn't, you can lose more.
     
  7. MTE

    MTE

    You are not missing anything, but you are not gaining any advantage over a normal strangle where you would sell 19 puts and 21 calls.

    I don't know how you are planning on daytrading it back and forth, but what's the point of putting on both sides, if you are planning on timing the market!?

    I think you are missing the fact that you have unlimited loss potential if the stock moves up or down big.
     
  8. IBM:
    currently at 180.62
    Short Strangle:
    http://www.theoptionsguide.com/short-guts.aspx
    short the Nov 185 put for 10.65 and short the Nov 175 call for 11.30.
    Net yield = 2195

    Lower breakeven = 163.05 Prob = 20%
    Upper breakeven = 196.95 Prob = 24%

    Maximum loss risk = infinity

    ..............................P/L.............
    155.....................(802)
    160.....................(302)
    165......................198
    170......................698
    175.....................1195
    180.....................1195
    185.....................1195
    190.......................690
    195.......................190
    200.......................(320)
    210......................(1310)

    So what's the expected value??
     
  9. falcon

    falcon

    The deltas on both sides would be close enough to 1 to make some money on small moves frequently, there is no timming of the market for the day trading portion.

    I will be taking profits on both sides when the market provides by rolling up and down and taking in more credit always having both sides at any given time, this way I will know my credit if it stays within its range at expiration.

    If it blows out to the downside Im not adverse to owing the stock and I open long positions to protect my upside.
     
  10. Can you name a few stocks that have gone to infinity? Even close to infinity?
     
    #10     Sep 28, 2011