Adjustment for short strangle

Quote from hedgex:

I was thinking of options on ETFs with 2-3 months in maturity. The of a 50% move is slim.

As a simpler example of the adjustment I was thinking of, let's start with an ATM put@25. If the stock goes up to 27, sell a call@29. If it goes to 29, sell another call@31. Let's say the term ends with the stock at 30. The first put@25 and the last call@31 expire worthless. I am still net short a call@29 which results in a loss of $1 on assignment. But I sold an ATM put and and two OTM calls, which offset the loss on the ITM call. If the stock ends at $26, I get to keep all the premiums.
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You can post about possibilities until the cows come home but it will just be an endless back and forth about just that.

If you want something more concrete, set up a generic spreadsheet template (3 month time period) that will crunch the numbers. Include time remaining until expiration, an average IV estimate for the time period and link it to a BS pricing model. Every time the underlying moves "X" points, triggering an option sale, the algorithms will flag you, determine the strike of the option sold and calculate the premium of the option sold.

At expiration, all options are at parity or worthless. You might have to manually determine the expiration total since it would probably take a program to read and tally the components.

Drop 3 months of prices of whatever underlying amuses you and you'll see how your theory performs. End of speculation. end of debate... unless posting hypotheticals is what gets you off :)
 
...sorry but I'm bringing it back from the dead for some clarification as this repair strategy never gets discussed.

IF you have an OTM short strangle on and lets say your short call is breached as you are approaching expiration.

Would it make sense to just roll up your short put so that you now have an ITM short call and ITM short put? You would use the profit from the previous OTM short put and now also have credit from both short options leaving you in a winning situation if the UL stays between the 2 short strikes.

Tear it up please..
 
What you can do depends on a number of variables - time elapsed (profitable decay), how far away expiration is, distance to strikes, how many strikes away the write is, liquidity (B/A width), etc. Modeling adjustments with available premiums will give you an idea of what's best (a risk profile you feel comfortable with).

IMO, you should be taking action before the short strike is breached. For example, if the strangle is 4 strikes wide, when the UL gets 1 strike away, roll the other side in a strike to bring in more premium (what you said). Or, add some long/short shares to offset your deltas so that your risk is balanced again.

As for your question "Would it make sense to ...", anything that works makes sense. If the UL doesn't cooperate, it didn't make sense (hindsight).
 
Quote from spindr0:

if the strangle is 4 strikes wide, when the UL gets 1 strike away, roll the other side in a strike to bring in more premium (what you said). Or, add some long/short shares to offset your deltas so that your risk is balanced again.
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Spin, was actually refering to moving the profitable strike not 1 strike in but all the way ITM so that your right in the profit area near expiry. It lets you allow the strangle to try and make its full profit potential and if gets past your short strike you are in a winning position once more.

eg: If UL is $20 you can roll up the profitable side to end up with:

-21p / -19c so your in a winning position if stays between the 2 strikes.
 
Quote from falcon:

Spin, was actually refering to moving the profitable strike not 1 strike in but all the way ITM so that your right in the profit area near expiry. It lets you allow the strangle to try and make its full profit potential and if gets past your short strike you are in a winning position once more.

eg: If UL is $20 you can roll up the profitable side to end up with:

-21p / -19c so your in a winning position if stays between the 2 strikes.
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Same answer as before. If the UL cooperates, you win (as long as the net premium received exceeds the -2 pt value of the guts strangle).
 
I'm not sure where some (just "some")of you get the idea that you put on a certain number of options and just leave them alone or close the position. Most know that options are a living, breathing, organism...changing your position curve daily. Sometimes, sure, you are lucky and everything works just fine... but options traders are constantly searching for the best options to sell, and make adjustments to their "Current Positions" as they change in Delta, Gamma, Theta each day. Sometimes you may close on strike in favor of another, because it's "better" - or it flattens out the bell curve, whatever. Other than synthetics, conversions and reversals, I don't see just putting something on a hoping for it to work.

Just trying to help,

Don
 
I agree Don, knowing how gamma effects Delta and the impact of IV on your positions etc... will better position you to make the correct decision when it's time to adjust.

It's also important not to over adjust, sure you can chase the UL by rolling ITM to a short guts position but you'll still face ongoing decisions.
 
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