Beating the Prime

Quote from MYDemaray:

MeTooxxx,

Since you are recommending:

1. maintaining a portfolio of 20-30 stocks
2. purchasing underlying, buy OTM puts, selling ATM calls (or reverse -- short underlying, sell ATM puts, buy OTM calls)
3. diversifying so that you are market neutral with the underlying

Would it be safe to say a similar strategy might be to simply short an iron butterfly (short 1 ATM call, short 1 ATM put, long 1 OTM call, long 1 OTM put) on an optionable index?

Advantages:

1. Only 1 position to watch -- potentially less headache and reduced transaction costs
2. Don't have to purchase the underlying (basically, you forego purchasing and selling the underlying of 20-30 stocks to become market neutral, by simply selling the ATM calls/puts and selling the OTM calls/puts)
3. "Instant diversification" (net effect similar to doing original strategy on 30 stocks, but staying mkt neutral)

Disadvantages:
1. Can't capture implied volatility skews that may exist in individual equities


Just a thought...comments?
More...

Nothing wrong with it; except I don't think it is as profitable or as stable of returns ...
 
I understand all your options have same expiration dates. So the Long put has to be necessarily far OTM to leave a meaningfull return on the short call. That means you are on risk on the underlying. You try to limit the risk with diversification being short and long the stocks. But is that sufficient ? and what about correlation ?
You have to do, I suppose, a hard work of selection on fondamentals, volatility etc ?? don't you ?
During the life of the option the short call may lose quickly a big part of its value. Do you wait till expiration anyway or do you roll down..... and roll up if the price go back ?
 
Quote from Mispe:

I understand all your options have same expiration dates. So the Long put has to be necessarily far OTM to leave a meaningfull return on the short call. That means you are on risk on the underlying. You try to limit the risk with diversification being short and long the stocks. But is that sufficient ? and what about correlation ?
You have to do, I suppose, a hard work of selection on fondamentals, volatility etc ?? don't you ?
During the life of the option the short call may lose quickly a big part of its value. Do you wait till expiration anyway or do you roll down..... and roll up if the price go back ?
More...

You have the idea; we don't roll, just close-out ...
 
that strategy, in my opinions, unfortunately does not exist, if your expectation on the minimum risk is less than 3.75% (5% - 1.25%).

:p
 
Quote from qdz:
that strategy, in my opinions, unfortunately does not exist, if your expectation on the minimum risk is less than 3.75% (5% - 1.25%).
More...
Only if one assumes, as do options pricing models, that the market is random. Since this is not entirely true, it should be possible to do better by incorporating a directional bias into one's options trading strategy. I do this by writing near-term OTM puts. For instance, today I sold SMH Jan. 22.5 puts for a credit of 0.25 . If the underlying declines ~8% or less within the next 10 days, I stand to make ~1%, otherwise I will turn around and sell Feb. 22.5 or 20 covered calls . The other day I sold EMC Jan 7.5 puts for a credit of 0.35. Chances are, the stock will get pinned to the strike on Jan 17, and I will make ~6.5% :cool: If not, see above, and so on. The main problem with this strategy is that, because there is always a chance that the market might crash, it may not be suitable for a low-risk account that I have in mind.
 
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