"relatively" risk free, "get money if the underlying is flat, moves up or moves down." Congratulations Buddy, you just found the secret to unlimited wealth. My God....
...haha, exactly right, all it counts is your risk, no payoff diagrams needed, no multi legs in your head. Thats why I say you can express the same strategy with 1-3 options instead of 7-8. The only reason dealers have so many options in their book is market making. The actual risk often looks identical (I slightly simplify here) to a simple straddle, strangle, call or put. Nothing magical to it.
very good points I think. People get fuxxed much more often than they care to remember. One leg expires a day earlier than the others (not possible on listed but OTC, for example), you're short gamma but the stock goes nuts hours before expiration and it freaks the heck out of you...thousand things can happen the more complex the strategy the higher the probability of a fuxxup. This probability is almost all the time more or less correctly priced into the option strategy as well making it worthless to believe you got something for free.
I'm happy to discuss flying by greeks or anything else. I'm not sure it merits its own thread but if there's anything you want to know, ask away. I agree with Asiaprop that a retail trader would never want a position with dozens of legs - transaction costs would eat you alive. I also agree that the only reason to have such a position is if you're a market maker. That was my situation when I was in the CBOT T-bond options pit. As a local (futures and futures options equivalent of market maker) you make markets on puts and calls at every strike and every month all day long and before you know it you have a position of thousands of options at every strike in every month. There is no way on Earth you could manage such a position other than by greeks, so we all became very adept at doing so. At some point I left the floor and began trading as a retail customer. I soon realized that strategies and approaches appropriate for the floor don't work as a retail trader, and so I completely changed my trading style. Now I generally have few legs on any one underlying. What never changed though is the way I visualize an options position - whether it is 80 legs or 2 legs. I see it as: 1. The overall delta, vega, gamma and theta. 2. The location of my premium, i.e., at what strikes I am long premium and at what strikes I am short premium. 3. The implied volatility of each strike. One huge advantage of doing it this way is that it frees you from the strait jacket of being tied to cookie-cutter strategies. Call spreads no longer need be 1 by 1, or a "known" ratio such as 1 by 2. If 19 by 33 gives you the risk profile you want, then fine, no problem. Rather than being tied to "iron condors" or "butterflies," you can simply decide to be short the middle and long the wings, if that's what makes sense, then choose the strikes that are the most liquid, or the cheapest, or whatever you want. The option game changes from being 2-dimensional to 3-dimensional. Moreover, when you start to see options this way, you develop a sensitivity to each option's personality. You start to see when they are behaving strangely and what opportunities that might suggest. You also have access to the whole universe of possibilities to play that anomaly. You find that the best strategy is never a cookie-cutter strategy, but rather a custom strategy hand-crafted from the options reality of that moment.
An inventory mamangement of sort--rather than having a specific position/strategy--am i correct? Does this also free you from having a pre-specified exit strategy? BB
I'd say it's a way of stripping an option position down to its essentials so you can see what it really is and how it behaves. It's like looking at an x-ray of the position so you can see what it's really made of. On the surface a 90 put and a 90 call may look completely different. But if you peek under their skirts you'll see they're identical except in the most superficial ways. When you look directly at option greeks it's like looking at the stripped-down version, with all the superficial covering removed. All that's left are the bare essentials. Makes it so much easier to see what you've got.
You probably just wanna see what's under the option's skirts you pervert! Actually you're right, it's a very rich area for instructional videos. I don't have the time right now but one of these days...
What do you use to keep track of this? Spreadsheet? Proprietary program? Retail program? Broker tools? Thx
I wrote a program in an ancient language called Quickbasic years ago, and still use it to this day. I also use Hoadley's options analyzer and Excel functions.