Two ideas I need shot down by someone smarter than me.

Discussion in 'Options' started by Terikan, Jul 3, 2013.

  1. Terikan


    Which is probably most people reading this.

    TLDR: 4 leg premium garnering straddle strangle swap thing, idea 2 is selling VXX leaps.

    Idea one. Sell a straddle at the strike, buy ITM strangle, where the goal is for the strike to eventually hit one leg of the strangle before expiration.

    So my thought is this. If the price stays the same, you make money as the straddle should lose more value than the ITM put and call.

    If the price of the underlying moves to one leg of the strangle, that leg gains premium for being ATM, while the other leg loses some (though likely less). They both lose some time decay, but so do the straddle legs.

    At the same time, neither straddle leg will be at the money, and so they will lose more time premium combined than both legs of the strangle.

    So time should be harsher on the straddle, in your favor, as should a move towards one leg of the strangle, up or down. Both time and movement should devalue the premium straddle more than the strangle, while gains based on movement should stay the same?

    I put a ? because that's one area I'm fuzzy on I guess. One other thing, these are options several months out. So yeah. Most my life I hadn't really wished I were less dumb, trying to understand the dynamics of options has changed that.

    Second idea: VXX eventually goes higher, eventually goes lower. It seems to be less a matter of if more a matter of when. So does it seem like a sound strategy to sell deep ITM puts of a derivative ETF like VXX with a year or longer duration? Then wait patiently for volatility to spike high enough, long enough so that VXX comes up to where you can buy back the puts for profit.

    I much prefer the idea of selling ITM calls against VXX (or heck UVXY), just not right now, because I feel less safe in the idea that volatility can decrease within the next year
  2. The difference between the inside strangle (guts) and the outside strangle is the box arbitrage. They are equivalent, barring the possibility that you're looking at rates arbitrage, which you're not. For your purposes they are IDENTICAL.

    So, you're in the iron fly (long the natural, synthetically). That's it. It's a long fly, short gamma and vega. It can flip modality on a number of moments, but that's well beyond this thread.

    Selling VXX LEAPS is selling vol of vol. It's really adding jet fuel to a fire by going out on duration in terms of V (not vol-line, but $-sensitivity).

    Admittedly a poor-analogy, but it's akin to selling DgammaDvol on index puts with vol and skew in the bottom deciles. It's simply suicide, especially in a LEAPS.
    Chubbly likes this.
  3. Terikan


    Ok so let's say buying OTM strangle, selling ATM straddle. Same results, but what are those results? Will the movement of the price and time decay benefit me?

    I took a look at a recent options chart, and it appears that at a 20 point move on SPY, buying 140/180 strangle and selling 160 straddle at jan14, would result in a sizable loss. I don't really get it, but there it is, I guess it does not work, without some sort of time decay or perhaps a bigger move.
  4. I added some content; as I had to go back to your post as I'd not quoted you.

    I trade ~5-10k long flies a month, all-in, so yeah I like them. A neutral-delta fly will suffer from movement, gain from time(and synth time (vol)), assuming a flat forward volatility.

    You're buying a path-independent/terminal distribution on the underlying. Option vol at expiration is zero. You can be horribly wrong on your forecast of realized vol and still pin to your body strike at expiration. It's simply too mechanically-complex to answer quickly.
  5. That is because your break-even point on a butterfly at expiration will always be inside the wings. I suggest looking online as there is a lot of basic information about flies available. By the way, congrats on seemingly deriving the idea for a butterfly from scratch without prior knowledge.