Buying Long-Dated STRANGLES...

P

PohPoh

Anyone have success with this tactic?

I've been doing well with straddles, but I notice that strangles (despite the huge negative theta action), if selected carefully, can be amazingly profitable (despite the capital tie up)...

Also, one of the guys I have learned alot from has always told me to never ever ever ever BUY strangles, and ONLY buy straddles...I'm just finding that to be not so true in my own research...

Any thoughts???
 
Quote from PohPoh:

Not relevant what I'm buying...
just wondering if the tactic is valid?
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It certainly is a valid strat WHEN volatility is low and you expect it to rise. In the current market conditions with high volatility you will be paying a premium for the strangle and if/when vols do come down you will lose...unless the stock moves strongly in one direction.

I'm looking at SELLING straddles/strangles in this market figuring eventually the market will be less volatile when the dust settles.
 
Quote from RichardRimes:

It certainly is a valid strat WHEN volatility is low and you expect it to rise. In the current market conditions with high volatility you will be paying a premium for the strangle and if/when vols do come down you will lose...unless the stock moves strongly in one direction.

I'm looking at SELLING straddles/strangles in this market figuring eventually the market will be less volatile when the dust settles.
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How would you deal with the scenario that indeed the markets will eventually become less volatile but before that happens you'll be either forced to liquidate your position or cover it with more capital?
 
Also, one of the guys I have learned alot from has always told me to never ever ever ever BUY strangles, and ONLY buy straddles...I'm just finding that to be not so true in my own research...
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"Never" is an inappropriate thing to say. "It depends" is more relevant.

What does it depend on? Your timing and selection. Your assessment of volatility. Your risk (fear) and reward (greed) tolerance. Your money management. Either can be more (or less) profitable than the other, depending on the what ifs.

As with everything, there are trade offs. Strangles cost less so they can lose less (worst case scenario at exp.). They're less affected by a change in IV so they lose less/make less if it changes. Because of the distance b/t strikes, strangles have a wider breakeven range but on a big move, will have a greater ROI.

And even though straddles cost more, they're not highly likely to lose a lot more because that maximum loss area is only a moderately small range on each side of the straddle's strike which is the amount of the difference in cost b/t the straddle and the strangle (if that makes sense to you, I doff my toupee to you :->)

And no, I don't buy long strangles, per se. During earnings, I do ratio write near month strangles (or straddles) against those of the next month.

What also makes sense to me is gamma scalping stock against long straddles. time permitting, I've been exploring this a bit since I read about it here a few months ago. In addition, there was a interesting article in this month's Futures Magazine about it. I'd appreciate anyone's thoughts on that idea.
 
Quote from gkishot:

How would you deal with the scenario that indeed the markets will eventually become less volatile but before that happens you'll be either forced to liquidate your position or cover it with more capital?
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doing front month only...no long term selling. right now fall looks to be volatile even thru Dec. Just looking at the basic economy and the general weakness I think there would be plenty of time to change strats when the vols do moderate. I also hedge...and watch it like a hawk:)
 
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