Condor premium value change vs. stock price change

[spindr0]

Quote from OptionSeeker:

By ratio, do you mean buying more of the wings, or selling more of the guts?

Buy more of the wings unless it's the last week before near term expiration then flip it and do reverse ratio double calendars (buy near month guts and sell more wings). Horizontal skew is essential for a good set up and you have to have a handle on an expected post EA IV. It's possible that this won't make much sense unless you can model various combinations.

There's an interesting, ongoing journal entry by johnnysharp, aiming for reverting to mean, which I've been following and might try after I've done more research on it. Thanks.

I've read a bit of the recent postings but I haven't had the need or the time to look further into it. If/when my gig ends, I'll check it out.

 

[spindr0]

Quote from Ms Varima-Garch:

I have also looked at jonnysharp's journal, very interesting. I wonder what people think about pairs trading. Does it have less built-in risk than non pairs trading. I mean trying to be market neutral? Anyone? I think it must be an art, really, because you have to know how the spreads behave. Has anyone ever used the Pair Trader software?

I don't know what jonnysharp is doing nor am I familiar with the software but AFAIK, the success of pairs trading is finding a good correlation. If you achieve that, it provides a tremendous reduction in risk and there's no time decay involved in the protection, as with options. And because of that risk reduction, you can take on much larger positions than you would normally be comfortable with.

 

[OptionSeeker]

Quote from spindr0:

Buy more of the wings unless it's the last week before near term expiration then flip it and do reverse ratio double calendars (buy near month guts and sell more wings). Horizontal skew is essential for a good set up and you have to have a handle on an expected post EA IV. It's possible that this won't make much sense unless you can model various combinations.

With the strangle-straddle swap, it seems like it's always a trade-off between how much gamma protection you want vs time decay with the extra wings, right? The vega also increases with more wings added.

So, when going long the calendar ratio, do you wait when IV is low in general or big difference in inter-month IVs?

As far as reversing in the last week of expiration, what is the idea? The near month gamma would be big so you want a big move, or if not, you want vol to go down, and price some distance away from the straddle strike. Thanks.

 

[spindr0]

Quote from OptionSeeker:

With the strangle-straddle swap, it seems like it's always a trade-off between how much gamma protection you want vs time decay with the extra wings, right? The vega also increases with more wings added. So, when going long the calendar ratio, do you wait when IV is low in general or big difference in inter-month IVs?

As I mentioned earlier, it's for earnings plays. That means inflated IV and generally, a one day hold... so time decay isn't an issue.

As far as reversing in the last week of expiration, what is the idea? The near month gamma would be big so you want a big move, or if not, you want vol to go down, and price some distance away from the straddle strike.

Exactly. You want an IV expansion, low $ cost near month options and horizontal skew for your set up (which take a lot of sifting to find). Post EA you want price movement and/or IV contraction. The more of each, the merrier.

IMHO, it's like a playbook. Different strategies are selectively appropriate at different times as well as in different circumstances. A more basic example would be the foolhardiness of selling naked puts and bullish spreads in a bear market. At some point you have realize that it's time to sell naked calls or do bearish spreads. It's a round hole in a round peg kinda thing

 

[OptionSeeker]

Thanks much, spindr0.

I am starting to get a feel for the basics, and which strategies might make sense in which environment.

Okay, one more question, if I may:

Let's say a stock is in a historically relatively low IV environment, and I think vol will either stay or increase. If I did the stangle-straddle swap, long the back month strangles with extra wings, short front month straddle (with, say 3-4 weeks left) but still theta positive (and thus gamma negative), would this position need adjustments at all in the very near term, assuming IV didn't drop further? I'm somewhat covered with the extra wings should the stock explode. Thanks.

 

[spindr0]

Quote from OptionSeeker:

Let's say a stock is in a historically relatively low IV environment, and I think vol will either stay or increase. If I did the stangle-straddle swap, long the back month strangles with extra wings, short front month straddle (with, say 3-4 weeks left) but still theta positive (and thus gamma negative), would this position need adjustments at all in the very near term, assuming IV didn't drop further? I'm somewhat covered with the extra wings should the stock explode.

If you can show me a position where there's no loss area in the P&L curve, I can guarantee you that your only adjustment will be to take profits, sooner or later... if so inclined. But given that there's a minimum distance of at least one strike b/t your short and long legs, what do you think is going to happen to alpha, beta, Moe, Larry and Curly if the underlying moves that far? Gonna consider adjustments or just turn down the volume?

 

[nlslax]

Quote from dagnyt:



You can look at it and call it a prediction on future price, but I don't. I look at it as: "If it continues to move in this direction, I will lose too much. I must reduce that risk."

Mark

Thanks for the info Mark. I have been adding calendars to my IC positions as a defensive move when the underlying moves too far.

When would you use a calendar and when do you think it would be better to buy back the endangered vertical and sell another further out of the money?

 

[JohnGreen]

Optionseeker, I'm pretty sure Spindr0 has his tongue deeply buried in his cheek on that last comment about Moe and Curly. The fact is that if you completey neutralize all aspects of your option--delta, gamma, theta,and vega (I'm assuming rho is negligible most of the time), then you will also basically negate your profits, too. With IC's you are working to keep your theta, but have the delta/gamma situation relatively neutral. Vega will be a constant concern for writers since a rising vega causes the premium erosion to go far slower, and sometimes even reverses it for a while. If you have a lot of out of the money wings, you will help balance your vegas and gammas, but they do cost money. You will always wind up in a balancing act, no matter how you adjust.

One way to keep a potential for profit is to go into a two month IC and use the current month for your longs, and the second month for your shorts, rolling back in time when the opportunity presents itself (usually for more cash). Then, a good move may make some of the longs pretty valuable.

Calendars also fit into that scenario, as well provided you can do them fairly cheaply. I'm curious, as well, how other people are using calendars in their adjustments.

 

[MTE]

Quote from JohnGreen:

...One way to keep a potential for profit is to go into a two month IC and use the current month for your longs, and the second month for your shorts, rolling back in time when the opportunity presents itself (usually for more cash). Then, a good move may make some of the longs pretty valuable...

The only problem with this setup is that your shorts would be considered naked and hence would require more margin.

 

[JohnGreen]

MTE, you are right.

I should have explained it a bit more carefully. I should have said credit spreads in the second month and debit spreads in the front month. I rarely if ever buy or sell singles. Otherwise, you will indeed have a margin problem on your hands and I like to have a pretty conservative, well controlled position. In fact, the one big plus to doing the debits in the same month is that you can often have a margin reduction involved if the debit spreads are closer to the money than the credit spreads.

I also want to comment on the rolling adjustment that involves increasing size. One of the reasons that I never start out an IC using all my margin is to give myself the ability to size up into a larger position. When I am doing this, however, I also buy some more debit spreads to help reduce my own risk, and increase the potential windfall if the market trends strongly in one direction.