What's wrong with this strategy?

Discussion in 'Options' started by nravo, May 29, 2007.

  1. nravo


    Let's use options on currency futures, for reasons I won't bore you with. Let's say I buy the June EUR futures @ 135 and write an ATM call for like 40 pips. And I put in a stop order for the futures at 134. 60. Next, I sell a Sept EUR futures at, say, 135 and write a put for 40 puts and put a stop in for the Sept futures 40 pips under. I collect about 40 pips -- give or take a few for slippage -- no matter what, @ June expiration, right? (And close the Sept position.)

    What is this strategy called, btw?
    What are the caveats?
  2. MTE


    Essentially, the Jun position is a synthetic short put and Sep position is a synthetic short call. So combined you have a short "calendarized" straddle. Why don't you just plot it out and see where your risk is.
  3. As MTE said, you have a type of "straddle". You want the market to sit still so that you don't get hurt by the short-options. The futures approximately offset each other. If the market rallies quickly, you'll be hurt by the short-call. If the market falls hard, the short-put will bite you.
  4. nravo


    But, given the stops, don't I really have a short straddle plus a long futures position, or a short futures position -- depending on which side gets stopped out if there is a price swing larger than the amount of the options premium collected.

    The risks I see are rebound after the stop and, of course, the stops not working, getting gapped or something. Any other risks? I plotted it, and maybe I'm having a brain fart, but with the stops in and working ......
  5. If the stops work you own a (fairly riskless) future calendar, and a short call or put. Essentially you suddenly are nakes delta. I would not underestimate the pain and sorrow that can cause. Not to mention sleepless nights.

  6. nravo


    True, on the stopped out leg I am naked a call or put. But what if I close that, too, and take whatever profit I have on that leg. And then let the other future/option leg run (with similar stops.) Sure if both stops get hit, I break even or thereabouts. But if not the risk/reward doesn't seem so out of whack.
  7. Well, the point is, your stops have to be very accurate to prevent the losses incurred from becoming bigger than the premium received.

    Btw. I just saw you stop the futures, I thought you stopped the options; no big deal.

    Your long fut+short call and short fut+short put are equivalent to resp. a short put and a short call. If you remove eg. the long fut you remain a short call and a synthetic short call, so 2 short calls in effect.

    You strategy is a very complicated way of owning and adjusting a short straddle, which is a hard enough task as it is. Your only friend is theta (time decay) and vega (if you'r lucky), but those are in general hardly enough to cover the losses from delta/gamma movement.

    This is not the holy grail, keep on searching. At the very least do a few months of papertrading.

  8. lar


    High Vig is a significant issue in such a mulitlegged position.

    Also, generally speaking, I have found the search for profit with no risk to be a losing game. That kind of defense is expensive.

    Peace and Gtty,

  9. nravo


    Thanks for the second and third opinions, guys