Find the edge :)

[jamesbp]

Yep. Definitely was an eye-opener for me WRT synthetics. And now that I think about it, it also starts with an options thought exercise:

QQQQ is trading at 37.30; the 36 call is going for 1.70 and the 39 put is going for 1.90. A trader buys ten of each. Obviously, this is a good position if there is a large move in either direction but what is the worst-case scenario? Owning ten calls at 1.70 and ten puts at 1.90 is 3.60 ten times making a total investment of $3600 (10 x (1.70 + 1.90) x 100 shares).

So, what is the maximum you can lose and why?

Basic position dissection ( a la Cottle ) ...
Long 36call / 39put Guts (ITM) strangle bought for $1.70+$1.90 = $3.60
Dissect out $3.00 box ( difference between strikes )
Synthetically Long 36put / 39call strangle bought for $1.70+$1.90 = $3.60 - $3 box = $0.60
Max Loss $0.60 x 10 contracts = $600

 

[BlueWaterSailor]

Basic position dissection ( a la Cottle ) ...
Long 36call / 39put Guts (ITM) strangle bought for $1.70+$1.90 = $3.60
Dissect out $3.00 box ( difference between strikes )
Synthetically Long 36put / 39call strangle bought for $1.70+$1.90 = $3.60 - $3 box = $0.60
Max Loss $0.60 x 10 contracts = $600

That's exactly what I was looking for. If you didn't copy it out of the book, congrats.

(Man... I REALLY want to get to a point where I can just look at a trade and see that, rather than having to grind through it mentally.)

 

[guru]

That's exactly what I was looking for. If you didn't copy it out of the book, congrats.

(Man... I REALLY want to get to a point where I can just look at a trade and see that, rather than having to grind through it mentally.)

Most of the time people trade off of the option P&L graphs where they can see the areas and extent of potential losses vs wins, however inaccurate. So I’m assuming that you also use those graphs and can see whatever you’d see otherwise, just wishing for a better vision that really wouldn’t be different…

 

[jamesbp]

That's exactly what I was looking for. If you didn't copy it out of the book, congrats.

(Man... I REALLY want to get to a point where I can just look at a trade and see that, rather than having to grind through it mentally.)

Second nature ... once you have done it 10,000 times !

 

[samuel11]

We sell 200 65 puts at 20.10

how? The original post said 10.1 / 10.7. I guess you meant 10.10 instead of 20.1, just a typo

 

[MrMuppet]

how? The original post said 10.1 / 10.7. I guess you meant 10.10 instead of 20.1, just a typo

Yeah, it should read 10.10...it was a typo

 

[Eikfe]

Basic position dissection ( a la Cottle ) ...
Long 36call / 39put Guts (ITM) strangle bought for $1.70+$1.90 = $3.60
Dissect out $3.00 box ( difference between strikes )
Synthetically Long 36put / 39call strangle bought for $1.70+$1.90 = $3.60 - $3 box = $0.60
Max Loss $0.60 x 10 contracts = $600

And by Box you mean the difference the strike prices ?

 

[guru]

And by Box you mean the difference the strike prices ?

Box is the box spread.
https://www.google.com/search?q=options+box+spread

 

[BlueWaterSailor]

Most of the time people trade off of the option P&L graphs where they can see the areas and extent of potential losses vs wins, however inaccurate. So I’m assuming that you also use those graphs and can see whatever you’d see otherwise, just wishing for a better vision that really wouldn’t be different…

That's... not exactly the aspect I'm talking about. Looking at the book and seeing the skew is something I'm taking for granted here; what I'm - let's call it "envious of" - is the skill and the speed in reacting to it that the pro guys have developed. The 10,000x repetition that @jamesbp is talking about; closing the OODA loop, if you're familiar with the concept.

 

[jamesbp]

And by Box you mean the difference the strike prices ?

When using to 'Dissect' positions the difference between the strikes is the 'notional price' of the box spread on expiry ( market price would be slightly different due to bid-ask / carry )

I think of the Box Spread as a means of 'converting' one position into a synthetically equivalent position.

Say 95-105 Box

Long Box ... think long verticals ... +95/-105 call vert || -95/+105 put vertical ... debit $10
Short Box ... think short verticals ... -95/+105 call vert || +95/-105 put vertical ... credit $10

Can then be used to convert

Guts Strangles -->> Strangles
Natural Flies -->> Iron Flies
Natural Condors -->> Iron Condors