I've been selling naked calls in the past and had great success with it, until recently. It's pretty much bulls**t. I wrote two canadian calls at 93 in June, they're already worthless. I wrote three rough rice calls at 1040 in July a couple of weeks ago and they are at the same price. I also wrote seven july $17 calls in Silver about a month ago and pretty much got my ass kicked. Silver went crazy, I exited all of them but two and took a loss. My question is this I don't want to write naked calls or puts anymore but I want to do some strangle strategies. For the rough rice contract I'm currently in I'm thinking about keeping my three calls in june at 1040 and writing puts outside of the money to offset any lossed that may happen. What do you guys think? Have you tried strangles and had good success with them?
I'm not sure I understand the shift in your strategy--you had bad luck with losses on selling premium, so you're going to sell even more premium? Either way, you have to accept unlimited risk in exchange for the odds being in your favor. Strangles require the same management any other position (particularly short gamma) requires. You need to adjust to keep your deltas sane and in sync with what you expect to happen. Take a look at condors (iron or otherwise)--they are essentially the defined-risk strangle. (Much like a butterfly is a defined-risk straddle)
What about selling 3-4 calls out of the money and then buying buying one call close to the money in the same month.
You mean buying a ratio call spread (selling a call backspread). Draw its pay-off graph to see how your position value changes with the price, over time. Your profit is maximum around the OTM strike. <img src=http://www.elitetrader.com/vb/attachment.php?s=&postid=1027238>
(1) Be willing to sell shorter-dated options. In silver, sell May instead of July. Same thing in rice. You'll get the time decay and volatility decay kicking in sooner. (2) You seem to be always bearish because you're only selling call options. If a market is in a well-defined uptrend, consider selling puts instead. Get comfortable with that before getting involved with straddles & strangles. (3) With physical commodities (except cattle?), implied volatility will rise and possibly spook you out of some positions too soon, no matter how far out-of-the-money you are. (4) If you really feel bold, you can sell straddles 5 minutes before the non-farm payroll number & Fed announcements and hope that the market doesn't move too far afterwards. Start out with a one-lot first.
What about going into serial contracts, contracts that don't have underlying futures contracts. Would you say it's okay to go into a june silver option contract rather than a may or july. Is there enough liquidity in those contracts?
By the way you phrase your questions, you aren't that experienced in trading options. Here's a question you should ask yourself 1st. Why am I selling naked options which are risky enough, to selling strangles and trading ratio spreads? Now your playing russian roulette with 2 guns instead of one. Anyways, a safer way to sell premium is to short verticals. Also, as brought up already, sell frontmonth options as they have the highest time decay. Also if you sell in 1 direction and are wrong, and decide to sell in the opposite direction, eg. sell calls when up then sell puts, buy back those calls. Otherwise your short a strangle on which your wrong on 1 side already.
Has anyone considered selling strangles about 1 or 2 std dev ITM, with a 30 - 60 day expiration where the IV is at least 10% higher than the HV? I've been testing it and it has worked well, even in this highly volatile environment. Although it may seem counter-intuitive to do this, it really makes good sense if you analyze the potential benefits to detriments. The biggest risk is that the options may be exercised. As long as the premium received is greater than the difference between the market price when exercised and the strike price, you'll be o.k. With each passing day the theta, as well as the vega in all likelihood, would be working in your favor. Your planned exit would be to enter a stop at break-even. Even with slippage, the loss in all probability would be minimal. The good thing about selling ITM is the premium received on both sides. This gives a greater margin for error. Walt
Wow, nice necro. As I read your post, I was trying to figure out what it meant for a strangle to be ITM. I have a feeling you mean writing an ITM call (low strike) and an ITM put (high strike). Just so's you know, that position is equivalent to writing the put at the low strike and the call at the high strike. There's really no advantage to tying up additional cash in the amount of the difference between the strikes. There's no greater margin for error, because it's all intrinsic and it will always be intrinsic, and you will pay it all back when you close the position.