DITM strangle?

Quote from serrow:

I really like the way that DEEP ITM puts and calls behave when they are close to expiration. Love the idea of buying something so closely matching the underlying with so little time value to lose. My question comes when keeping a neutral delta between puts and calls.

any profit making scenarios for say, buying into the strangle (I believe its a strangle anyway) and then selling when one leg swings, then selling a call or put for protection on the other side?

example

UNDERLYING 40

BUY 30 CALL
BUY 50 PUT

when underlying goes to 35

sell 50 put
sell atm call

I am stating my rookiness, but i'd enjoy hearing about possible strategies in using deep ITM calls and puts that could possibly allow for some protection.
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lowvoltrader...to review the quote he basically IS just trying to trade directionally....selling the put he purchased and doing a call spread( debit) if stock goes down and I assume the reverse if the stock goes up. .

Nothing wrong in buying strangles when volatility is low and you expect increased volatility. Not a strat I'd do now unless you think vol's are going to 30.
 
thanks to richard rimes for pointing that out; mea culpa! I find this topic interesting though. Suppose we consider it from the view I had. With stock at 40 , Long a gut strangle 35-45. If tock moves up sell the 45 call and 45 put to lock in a vertical debit spread at possibly a credit. Comments?
 
Quote from serrow:

I really like the way that DEEP ITM puts and calls behave when they are close to expiration. Love the idea of buying something so closely matching the underlying with so little time value to lose. any profit making scenarios for say, buying into the strangle (I believe its a strangle anyway) and then selling when one leg swings, then selling a call or put for protection on the other side?
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Neg expectation when you add friction. Maybe you can make up for in volume :D
 
Quote from lowvoltrader:

thanks to richard rimes for pointing that out; mea culpa! I find this topic interesting though. Suppose we consider it from the view I had. With stock at 40 , Long a gut strangle 35-45. If tock moves up sell the 45 call and 45 put to lock in a vertical debit spread at possibly a credit. Comments?
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If you leg into it ...then that is a possibility however it does take movement in the stock and patience. While you are being patient theta eats away at your premium. If you do find a stock that historically moves around a bit then give it a shot, as long as you figure out the risks and have a plan if things don't go your way you won't hurt yourself too badly.

It is very hard to do because options are priced so efficiently, however if you are very familiar with a particular stock and have been successful in trading it directionally then options might offer some leverage.
 
Suppose we consider it from the view I had. With stock at 40 , Long a gut strangle 35-45. If tock moves up sell the 45 call and 45 put to lock in a vertical debit spread at possibly a credit. Comments?
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My two cents is that the deltas of the put and call are almost equal (tho of opposite sign). They would be about equal in magnitude in the vicinity of 39. With a move in either direction, the delta of the option that is going more ITM will be increasing while the delta of the option that is going less ITM will be decreasing. So for every $1 move, you'll net the difference in deltas. With a $5 move to either side, you'll have a gain, either way.

However, life isn't that simple. Every day, time decay will be eroding your premium. Reduced IV will lower it as well. If the underlying goes nowhere, you'll lose the TP paid.

Big moves sooner will make you more. By expiration, the move will have to be past a strike plus the TP paid for the strangle.

And as other posters the gut strangle is at a disadvantage to its synthetic equivalent.


From your description, it's not clear to me what subsequent adjustments you are considering (month, strike, etc.). If you care to clarify, I'll bump you up another 2 cents! :)
 
OK, I'll take the challenge to illustrate with numbers. Im using a b-s calculator so all prices are hypothetical modeled prices with iv of 35%. stock at 40, 120 days, 35 call 6.56, 45 put 6.08, total cost 12.64 of which 2.64 is time value. we'll close strangle if theres no large move in sixty days so at worst we risk two months time decay. lets say 30 days pass and stock has moved to 45. at 90 days to expiration the gut strangle is worth 13.5 (45 put 2.88 and 35 call 10.62). however the 45 call is now worth 3.38. Lets consider two posibilities. first we can adjust into a 35-45 vertical by selling put and selling call and we own a ten point debit vertical for only 0.30 with 90 days to go (had stock moved larger we my have even owned for a credit. (6.56-3.38-2.88=0.30).... second we can adjust to a 35-45-50 fly AT A NET CREDIT! (Please check my math). sell two 45 calls for 6.76, buy one 50 call at 1.53, sell 45 put at 2.88= 6.56-2*3.38+1.53-2.88= negative 1.55. In other words a modest move in the stock price and we own the fly for a no-lose net cost. And we can do the same had the stock moved down such as to 35. Comments? Is my math right?
 
hi! I omitted the cost of the 55 call which is .61 (90 days to expiration iv 35%). had we done the 35-45-55 fly the net cost would be 6.56-2*3.38+.61-2.88 = 2.47 NET CREDIT!!!
 
Quote from lowvoltrader:

OK, I'll take the challenge to illustrate with numbers. Im using a b-s calculator so all prices are hypothetical modeled prices with iv of 35%. stock at 40, 120 days, 35 call 6.56, 45 put 6.08, total cost 12.64 of which 2.64 is time value. we'll close strangle if theres no large move in sixty days so at worst we risk two months time decay. lets say 30 days pass and stock has moved to 45. at 90 days to expiration the gut strangle is worth 13.5 (45 put 2.88 and 35 call 10.62). however the 45 call is now worth 3.38. Lets consider two posibilities. first we can adjust into a 35-45 vertical by selling put and selling call and we own a ten point debit vertical for only 0.30 with 90 days to go (had stock moved larger we my have even owned for a credit. (6.56-3.38-2.88=0.30).... second we can adjust to a 35-45-50 fly AT A NET CREDIT! (Please check my math). sell two 45 calls for 6.76, buy one 50 call at 1.53, sell 45 put at 2.88= 6.56-2*3.38+1.53-2.88= negative 1.55. In other words a modest move in the stock price and we own the fly for a no-lose net cost. And we can do the same had the stock moved down such as to 35. Comments? Is my math right?
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math may be correct but you are making an assumption that the vols will STAY at 35...what happens if they go to... say 20? which would be a strong possibility if the stock does go up.

plus the worse case is not holding for 60 days...holding for 60 days AND vols decrease while stock moves 2 pts.
 
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