Trefoil, your observations about IV are interesting, but I must admit that the IV effects are fairly complex with this kind of system. As you can easily see, there are a least 6 options involved-- 3 on each side and often 8 if the "inside options" are spreads, too (frankly, it often leads to a few more because I usually do these things in stages, keeping margin available to adjust, etc.). The volatility effects are very dependant on the exact positioning of the strikes as well as the ratios involved which vary. The short answer is that often things are usually a bit of a wash in the end, but in the short term, if volatility rises, the further OTM short spreads tend to raise in value somewhat more, which lowers the portfolio value. The difference between high and low IV, assuming things are static is not that significant. The market pricing of IV is usually decently reflective of general market conditions. When IV is high, usually you need to stay a little further away from the current index value, and when it is lower, you can come in a bit closer, but I usually try to stay a safe distance away anyway. Overall, I prefer lower a bit more because it means less adjustment, and when it is quieter it's easier just to watch, wait and then collect each month. It doesn't bother me if my "inside" calls/ puts expire worthless. It also means that an unexpected sharp sudden movement, especially close to expiry will probably cross your "inside" calls or puts and add value. This last week was very interesting for me because Tuesday was a nasty little decline, which made me concerned that the 1170's were going to go down the tube worthless. Fortunately, Thursday was a strong upday, and they regained their value. I really should have ditched the 1195/1200's on Tuesday!!
Hi John, the results of the poll so far have surprised me a little. I would have thought the majority of people on ET would be selling the weeklies. I personally would never sell weekly options or monthly for that matter. Anything under 30 days and all your trading is pure gamma, not implied volatility. Gamma should be bought, not sold generally speaking. And gamma is very hard to value in my opinion. I think gamma is best for guys that have a directional edge. You get the best of both worlds. Huge gearing and risk control, neither which you get with trading the underlying. There are currently about 30 or so products available on the weeklies and expanding every month. Great products. John, I would much rather sell ATM straddles out in time with high implied volatility rather then trading iron condors. I've been know to say once or twice on this message board that iron condors have the most negative edge of any trade in the option universe.
Point taken, Mav, At least with ATM Straddles, you are fairly well paid for the risk! That's one of the big drawbacks of IC's. I've at least tried to get paid for a move into some risky territory! Weeklies do offer that opportunity for a reasonable price. With the gamma comment, I couldn't agree more. Volatility is way easier to see and measure. I've seen options go from "worthless" to expensive in pretty short order.
Your question is not specific to weeklies. It will still be determined on a case-by-case basis. The way you pose it make it hard to answer in a staightforward way, so is the polling.
The way you pose the question make it hard to answer in a straightforward way. The question does not just apply to weeklies. It will be still determined on a case by case basis.
Hey Beating the S&P (and I hope you are!) Sounds like we might wind up trading with each other! I haven't traded the weeklies yet, but if I do I'll probably spread the DEC5 series to start with. They're kind of convenient for tax purposes. Who knows, you might be on the other side. Actually, to be serious, your strategy makes a lot sense if the market stays fairly static or moves slightly toward the monthlies you have bought. In theory, the theta for a weekly should be about half of a month as a quick rule of thumb, so it could easily play in your favour. Even if the market moves away from your monthlies a little many times you can probably catch enough theta to keep the losses small. It's probably a lot like a four month calendar with a lot less time to go.
I was here a couple years ago, spouted off on some great boneheaded ideas, then disappeared from ET. I have crawled back from the abyss though. Awesome learning experience though. I'd be happy to furnish a few details. Nothing teaches like big mistakes. Fortunately they weren't fatal. Although the trading account got very sick (bleakest was Feb/Mar 09), I didn't have to come up with any dough. Currently I only trade the options on the ES-mini, and if there is a label to my trading, it would be closest to a double diagonal spread. BUT, I don't pay too much attention to any particular individual position. I ABSOLUTELY manage delta, theta, gamma, vega (basically in that order) on a daily, hourly, sometimes minute by minute basis. It's my choice of those 4 that dictates my P/L as a guaranteed winning option strategy does not exist. (man I wish I could write more better )