Almost Risk Free Trade

lar · Aug 10, 2007

Hi benysl,

Fwiw, I was not talking about the b/a spread but the spread between the contango months. (The different months you selected trade at different prices) It is necessary to take this into consideration when evaluating the risk involved. IOW, the risk is much greater than the distance between the short strike and your protective strike because of this.

Thanks for sharing - I use similar stratigies in regards to making the shape of my profit area match a normal distribution of prices *plus* a cushion. Your ability to carry the protective strike for free (once the first month short expires) is sound. You may want to explore doing it with serial months where there is no spread between the long and short months - ie - they are fungible.

Peace and gtty,

Lar

Eliot Hosewater · Aug 10, 2007

Quote from lar:

Hi benysl,

Fwiw, I was not talking about the b/a spread but the spread between the contango months. (The different months you selected trade at different prices) It is necessary to take this into consideration when evaluating the risk involved. IOW, the risk is much greater than the distance between the short strike and your protective strike because of this.

Thanks for sharing - I use similar stratigies in regards to making the shape of my profit area match a normal distribution of prices *plus* a cushion. Your ability to carry the protective strike for free (once the first month short expires) is sound. You may want to explore doing it with serial months where there is no spread between the long and short months - ie - they are fungible.

Peace and gtty,

Lar

Do you mean call and put calendars?

lar · Aug 10, 2007

Quote from Eliot Hosewater:

Do you mean call and put calendars?

Hi Eliot Hosewater,

I am not sure of what you are asking about... my positions? or something regarding serial months being fungible? or the spread between different contract months?

I am also not looking to hijack this thread. I just want to help the OP reevaluate the risk of these positions.

Please be a bit more specific.

Peace and gtty,

Lar

Eliot Hosewater · Aug 10, 2007

Quote from lar:

Hi Eliot Hosewater,

I am not sure of what you are asking about... my positions? or something regarding serial months being fungible? or the spread between different contract months?

I am also not looking to hijack this thread. I just want to help the OP reevaluate the risk of these positions.

Please be a bit more specific.

Peace and gtty,

Lar

I was referring to your last sentence:

You may want to explore doing it with serial months where there is no spread between the long and short months

Were you suggesting doing two calendar spreads, i.e. same strike price, different months, both call calendar and put calendar?

mgzheng · Aug 10, 2007

Each time you roll down there *will* be a lost, so as it keeps going down, you will just keep losing. Better cut loss now and move on to options on more stable assets, probabily just commodities now.

daddy'sboy · Aug 10, 2007

Quote from lar:

Hi benysl,

Fwiw, I was not talking about the b/a spread but the spread between the contango months.
Lar

Hi Lar
I thought contango only applied to commmodities futures options and not stocks/indices options. Could you please clarify your interpretation of 'contango'?
Cheers
db

daddy'sboy · Aug 10, 2007

Quote from mgzheng:

Each time you roll down there *will* be a lost, so as it keeps going down, you will just keep losing. Better cut loss now and move on to options on more stable assets, probabily just commodities now.

Not quite (it's a bit more complex than your standard vertical credit spread because of the calendarisation and the many months between the front month short strangle and the far month long strangle) because benysl is rolling the puts down and out, closing the strike separation between his credit spread legs (e.g. the bull put spread) which results in a reduction in the max risk (i.e. the difference between strikes) as long as he can do the rolls for a credit or even his risk will improve. If the rolls were in the same month, i.e. just rolling down (instead of down AND out), then, yes, he'd be losing premium every time he rolls and the max risk would change depending on how much he paid for the rolls (credit vertical max risk = difference between strikes minus/plus credit/debit).
db

daddy'sboy · Aug 10, 2007

Quote from daddy'sboy:

Every time you roll your short put down you increase your risk and reduce your potential max profit - the amount of increased risk depends on the amount of rolling. It is not a risk free trade and adjusting a losing position will NOT give you a better risk/reward no matter how much you want it.
db

My earlier post in this thread is obviously not quite right as far as benysl's example is concerned - it's what happens when you type before you think

. See above answer.
db

lar · Aug 11, 2007

Quote from daddy'sboy:

Hi Lar
I thought contango only applied to commmodities futures options and not stocks/indices options. Could you please clarify your interpretation of 'contango'?
Cheers
db

I thought QQQQ was another name for the Nasdaq_100 - which is a futures instrument where friday eod:

Aug 2007 Underlying Futures Price = 192900
Sep 2007 Underlying Futures Price = 192900
Oct 2007 Underlying Futures Price = 195175
Dec 2007 Underlying Futures Price = 195175

Here, the Aug options are serial to the September options but there is a spread between the N/U vs the V/Z of 195175 minus 192900 = 2275 difference due to contango.

(If the QQQQ is not a futures instrument then I have more homework to do.)

Lar

anti ad hominem · Aug 12, 2007

Quote from lar:

I thought QQQQ was another name for the Nasdaq_100 - which is a futures instrument where friday eod:

Aug 2007 Underlying Futures Price = 192900
Sep 2007 Underlying Futures Price = 192900
Oct 2007 Underlying Futures Price = 195175
Dec 2007 Underlying Futures Price = 195175

Here, the Aug options are serial to the September options but there is a spread between the N/U vs the V/Z of 195175 minus 192900 = 2275 difference due to contango.

(If the QQQQ is not a futures instrument then I have more homework to do.)

Lar

Nice explanation Lar, thanks. I was about to set off and do that homework myself, but this seems to make sense.