Just to be fair to Maverick74, he wasn't espousing the trade, just presenting it for others to contemplate. It was a front-month butterfly and a back-month wrangle. Damn straight it's far from perfect. Still, how many structures can you think of that make money if nothing happens and also make money in the event of a big move. IV is not really a factor, actually, as vega is neutral until the gamma becomes positive. You may be thinking of a variation proposed by some--a ratioed double diagonal--where vega is long from the outset. That variation is quite a bit different from Mav's butterfly-wrangle idea. The problem with the butterfly-wrangle is the risk zones surrounding the inner strikes. If the market moves into one of them and stops, the trade will realize its max risk. If only we could screen 200 stocks for this trade, maybe we could find an example or two where the risk zones were shallow and narrow.
Coming back to optios. Need safer trades.
- Thread starter iSeriesGuy
- Start date
Just to be fair to Maverick74, he wasn't espousing the trade, just presenting it for others to contemplate. It was a front-month butterfly and a back-month wrangle. Damn straight it's far from perfect. Still, how many structures can you think of that make money if nothing happens and also make money in the event of a big move. IV is not really a factor, actually, as vega is neutral until the gamma becomes positive. You may be thinking of a variation proposed by some--a ratioed double diagonal--where vega is long from the outset. That variation is quite a bit different from Mav's butterfly-wrangle idea. The problem with the butterfly-wrangle is the risk zones surrounding the inner strikes. If the market moves into one of them and stops, the trade will realize its max risk. If only we could screen 200 stocks for this trade, maybe we could find an example or two where the risk zones were shallow and narrow.
I agree that the Maverick74 thread was a great one and though he did "overhype" it with the title ("The Perfect Options Position" or something like that), he did say in the thread that it wasn't perfect by any means.
My favorite trade is much simpler then all of those legs though - selling short term straddles/strangles and buying more longer term straddles/strangles, plus I usually add a small number of extra OTM longer term puts to even out the P/L chart. Basically anything you can do that makes a W shape on the P/L chart can be good.
In McMillians book McMillian on options, he shows a trade such as this as well - a calendar spread that goes like this with IV = 20 - Date Jan 1 - XYZ at $100:
Long 52 Jun 100 calls
Short 44 March 100 calls
Long 15 Jun 100 puts.
The thing is for any trade like this you have to have a good understanding of IV - not just some academic theory understanding of what it means - but where IV is likely going. I feel like I can see when an IV has likely bottomed out or at least is darn close to it and do a trade like this "knowing" that IV will rise over a month or 2 (for example maybe earnings will start to come up). I have long given up on predicting future pricing.
JJacksET4
Yes, this is the ratioed double diagonal I was referring to above that some had suggested as a simpler alternative. You describe it more precisely than I did. It is long vega, so you have to have a feel for the immediate future of IV, as you point out below.
The thing is for any trade like this you have to have a good understanding of IV - not just some academic theory understanding of what it means - but where IV is likely going. I feel like I can see when an IV has likely bottomed out or at least is darn close to it and do a trade like this "knowing" that IV will rise over a month or 2 (for example maybe earnings will start to come up). I have long given up on predicting future pricing.
I agree, predicting IV is easier than predicting price, but it's not easy per se. I love McMillan's books! How clearly he explains everything! I like reading his books for their beauty of prose and humor as much as the edification they provide. One major point he makes in __Profit from Options__ in the chapter entitled "Buy low, sell high, volatility that is" is that we need to wait until IV breaks out from a historical low point. I use his site for the current percentile of annual IV list. If I'm putting on a trade with long vega exposure, I confine my choice of underliers to those in the first decile of their annual IV range and that have just begun to break out. The key is that they are already breaking out. Otherwise, they may just continue to languish.
Heck, I also use his site, but I have combined it with some other text files and I have a VB program to help me find trades. I included a screen shot of it in this post where I search for stocks from $49-181, IV from 19-41 and IV percentile from 1-25%. I can also check which expiration months are available and the volume. I have an earnings option, but I don't have the text file for that completed yet (long task to work on).
When I find stocks based on this program, I double check when earnings are and check the IV charts on www.ivolatility.com. I have found that high flying stocks with low IVs are usually bound to have increasing IVs sooner or later - also when a stock has earnings coming the IV usually heads up - sometimes more then others. I don't really worry too much about seeing an IV breakout, even though I admit a small uptick might be nice. I structure my trades such that any IV increase in a month or 2 will usually be good enough and if a stock was at a low range of IV and had some event coming, usually it seems to work out OK.
JJacksET4
No, I never had heard of it until now. Looks interesting. Usually I don't tend to do many straddles that I hold over earnings, but for what I do it can be useful to see what stocks did good on earnings and might be high flying stocks with low IVs now that earnings has passed. It looks like that site might be a good place for me to glance at to see who is doing good on earnings.
JJacksET4
I'm going to assume that we're not talking about conversions. IOW, when you buy the stock and the put and sell a call, the strikes are different. That's a vertical and I can't imagine that there are going to be many (if any) verticals where there's no risk if the stock is at or below the put's strike at expiration.
IOW, suppose we're looking at a collar with a long 50 put and a short 55 call. If the stock is near 50, the put costs 2-4 times what the call brings in (depends on the IV). If the stock is closer to 55, the reverse is true (call brings in 2-4x the put's cost) but the stock can lose 5 pts before the protective put kicks in and that potential 5 pt loss is far more than the net option credit received. The dividend is irrelevant since if the stock drops, it's your own money.
The issue isn't what happens below the put strike but what happens b/t the collar's strikes. There's definite risk there.
IOW2, in order to be risk free a 5 point vertical must bring in a 5 pt credit. I don't think so
A 1.3% PG gain in a month does not support the risk free collar thesis or prove anything unless PG was below the put's strike at expiration. If not below, it just means that that after netting out PG and all premiums, PG rose 1.3%.
I got my own trade mixed up! My apologies to you spindr0 and anyone else that read my post above. I didn't sell a call. I simply bought the underlying and a quite deep in the money put where there was very little time premium. No call was sold to finance the put. I have no idea why I remembered it that way at first. The dividend did, however, finance the time premium of the put, with money left over as profit.
OK, so to properly address your point this time around, there is a key difference between stock+DITM put and an OTM call of similar net delta in some cases. I wrote about it in the thread:
http://www.elitetrader.com/vb/showthread.php?s=&postid=2704758&highlight=post2704758
There's no money to be made from the dividend by holding an OTM call, but there is money to be made from the dividend by holding the stock and an underpriced DITM put. The underlying and DITM put hedge each other very closely, so that their respective values move in tandem for a net P/L of 0. Time premium on such DITM puts is low enough as to be compensated for completely by the dividend, with money left over as profit, yet market exposure is 0.