Conversions Butterflys or Going Naked with Contigency

C

CCurity

I daytrade and watch the market closely. However I would like to take a more delta neutral approach and trying to decide the best tack to take.

As an alternative to Butterflies, Condors, and reversals, I was thinking the following---and

Here is what I am trying to figure out.-" What is the downside to this option strategy?"

I am not sure what this strategy is called so I am calling it Going Naked with Contingency Plan - (But more experienced options players could probably tell me what the accepted name is for this....or just tell me where my thinking is bad.

I sell an ATM naked call for X dollars
I sell and ATM naked put for X dollars
The value of the proceeds equals 2X dollars

During the month if the underlying security moves more than X Then I purchase the security long or sell it short to cover any further erosion of my gains from the sale of the premium. If it moves back to less than X I sell or cover.

As long as I have a contingency to cover the volatility of the security thru either watching the security or a preset computer program, it seems like this would be a fairly safe strategy. Just requires watching. And of course the cost of the trade to get in and out of the security.

Is this strategy used by anyone?
Why or why not?
Thanks
C Curity
 
Quote from CCurity:

I daytrade and watch the market closely. However I would like to take a more delta neutral approach and trying to decide the best tack to take.

As an alternative to Butterflies, Condors, and reversals, I was thinking the following---and

Here is what I am trying to figure out.-" What is the downside to this option strategy?"

I am not sure what this strategy is called so I am calling it Going Naked with Contingency Plan - (But more experienced options players could probably tell me what the accepted name is for this....or just tell me where my thinking is bad.

I sell an ATM naked call for X dollars
I sell and ATM naked put for X dollars
The value of the proceeds equals 2X dollars

During the month if the underlying security moves more than X Then I purchase the security long or sell it short to cover any further erosion of my gains from the sale of the premium. If it moves back to less than X I sell or cover.

As long as I have a contingency to cover the volatility of the security thru either watching the security or a preset computer program, it seems like this would be a fairly safe strategy. Just requires watching. And of course the cost of the trade to get in and out of the security.

Is this strategy used by anyone?
Why or why not?
Thanks
C Curity
More...

It's called a short straddle and buying/selling the underlying as the price moves is called "gamma scalping". There's nothing wrong with your strategy except for the fact that it can be very dangerous with instruments that are prone to gaps, like stocks.

There has been a few threads on this topic, so try searching for them.
 
Yes, short both CALLs and PUTs at the same strike is short a straddle or combo.

Not a bad way to be short gamma but as MTE pointed out, gap/jump risk is the bane of short gamma strategies and the boon of long gamma strategies.

As with most option strategies, volatilty is key.

With respect to your buying/selling stock at certain points, your proposal is tantamount to negative gamma scalping. It is the opposite of the more common gamma scalping, a topic for which there is a vast amount of information on.

You may want to consider converting your short straddle into a butterfly after assuming some risk for a period of time. This strategy has been detailed in the following journal: Riskarb's combo to fly conversion journal

Good luck!

MoMoney.
 
Quote from CCurity:

I sell an ATM naked call for X dollars
I sell and ATM naked put for X dollars
The value of the proceeds equals 2X dollars
More...
#1 X does not equal X

#2 Whipsaw
 
This strategy is not feasible in a Reg-T account.... very margin intensive at the beginning, and when you long stock.


Quote from CCurity:

Thank you all for the input
More...
 
Quote from RCMLLC:

This strategy is not feasible in a Reg-T account.... very margin intensive at the beginning, and when you long stock.
More...

It depends what you're trading and position size.

Certainly more bang for your buck under SPAN or market maker haircut though.
 
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