Does anyone here modify their short straddles by using differing expirations in the legs? I have been playing with that as a way of expressing a directional outlook in the underlying, but have never encountered any discussion on such a trade. I might go short atm calls with expiry in 7 days, and short atm puts with expiry in 21 days. The idea is to take in more theta on the side I expect to trade favorably, while reducing gamma exposure on the side that I forecast as riskiest. I can then periodically roll the winning leg to stay delta neutral until expiration of the first leg. What are your thoughts on this approach, as a way of meeting my stated goals? Do you think this is a worthwhile idea? Is it insect worthy, or maybe it's already named after some insect or animal and I just haven't noticed.
Short straddles is how Nick Leeson brought down Barings Bank back in the 90's They're simply the most dangerous option trade you can put on.
It seems you have a good handle on the desired exposure. Something to consider: Why not just express a directional bias for simplicity? In practice, I think you will just flip/flop between your directional biases after expirations. Now, if you decide to do a short+long calendar spread. That is another thing. There is probably a reason why we don't have any new variations of 2 legged spreads in the last couple of decades. But, I can't fault you for trying to be creative.
Hi Steve, I do a variation of this strategy for around 5-7% of my portfolio. Its an active trading strategy due to constant adjustments and delta balance that you got to do. I assume you have proper risk controls to reduce exposure with appropriate (less theta) longs. In my observation, the delta curves on short straddles are rather steep at the inflection point. A +/- 1% change in price could change your delta by 10% due to the high gamma from short term expirations. Even with controls, I've seen risk of a vol shock and/or myunderlying having a big move to either side. I constantly monitor my margin and Value at risk (VAR). Even while setting my VAR to 99.9% on IB risk navigator, I've still seen my underlying positions dip beyond this number. I like your idea of starting the trade with a 7DTE call vs a 21DTE put. However, given current market conditions, your position adjustment could force you to roll the calls 21 days out and the puts 7 days out, :/ Nonetheless, I'm interested in your experiment and see what you find out. PS: Obviously, the straddle legging strategy is costly on commissions and even on IB, I'm giving around 8% of my profits on commissions. Other direction based strategies like spreads, calendars, diagonals are far less at 2% of profits.
I'd say this is pretty false. IMO, straddles are safer than strangles for the same potential return and anyway none of this had anything to do with Leeson. He brought down Barings because he just kept adding to a losing position - total hail mary stuff that didn't work out.
DEPENDING on the IV regime, why not just put on a skipped strike fly with the bigger debit on the side you don't expect it to land ie the call strike and put the "sweet spot" on the distro you think it will land? or calendar...?