Fine Strategy

S

Should

Hello everyone.
I've come up with this strategy, though surely I know i'm not the first one. I'm hoping you guys could help me sort out the kinds of risks and profits I'm getting myself into. I've only recently started studying options so your input will be very valuable, as well as recomendations.

So, I'm planning on:
Sell ATM Call
Buy OTM Call
Sell ATM Put
Buy OTM Put
All due in the end of may.

With the intent of using the credit to purchase june OTM puts, to catch the downside.

I've put the numbers in optioncreator.com and uploaded the files, so you can check it out. But I don't know if that chart can be trusted.

So, what do you think? Should I do it?
 

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You're long a fly (short the iron) and using the credit to buy puts. The credit equates to a call or put fly at a debit. You're short gamma in the fly, at it's highest value (neutrality) and buying deferred puts.

You're hosed on all if the market continues to rally. It's fine if we drop, but you're going to produce a lot of deltas (short) with time, between the put strike and the put wing of the fly.
 
Robert Morse said:
IMO, if you need help viewing your risk/reward, you are not ready to trade this. You should see this your head what it looks like.

Let us know how it works.
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I'm a noob in options trying to tap into the collective wisdom, I still don't know the name of most strategies. I'm mostly a stock fundamentalist having a hard time to understand the greeks.

Thing is I'm trying to find a better limited risk / unlimited reward than just plainly buying puts/calls. I was once lucky enough to catch a 5k%, but have been losing a bit of money every month trying to replicate, mostly because the prices wouldn't move that much or quickly enough. This is my take on trying to fix that.

IMO this also helps a bit with cashflow, since you kind of get a 1 month head start from the market to buy a 2 month put, with the chance of being able to keep the money and also helps with my "stock not moving enough" problem.

I get the fact that I take a limited loss if the stock moves up. But I think it's already overpriced and I would lose almost the same from just buying a put.

But I am still having difficulty thinking multidimensionally.
 
Last edited:
destriero said:
You're long a fly (short the iron) and using the credit to buy puts. The credit equates to a call or put fly at a debit. You're short gamma in the fly, at it's highest value (neutrality) and buying deferred puts.
More...

Thanks for pointing it out.
I initally thought that the resulting chart would be some kind of box spread, since the buying and selling is similar, hence i thought that the P/L chart must have been wrong. Being short Gamma just means that i'm getting money (credit) for the fly is that it?

destriero said:
You're hosed on all if the market continues to rally. It's fine if we drop, but you're going to produce a lot of deltas (short) with time, between the put strike and the put wing of the fly.
More...

Producing the delta means that the movement will be less effective as time progresses?

-

Also, volatility only affects my deferred puts but not the fly itself. If the market drops volatility will increase, helping me out right?
 
Should said:
I'm a noob in options trying to tap into the collective wisdom, I still don't know the name of most strategies. I'm mostly a stock fundamentalist having a hard time to understand the greeks.

Thing is I'm trying to find a better limited risk / unlimited reward than just plainly buying puts/calls. I was once lucky enough to catch a 5k%, but have been losing a bit of money every month trying to replicate, mostly because the prices wouldn't move that much or quickly enough. This is my take on trying to fix that.

IMO this also helps a bit with cashflow, since you kind of get a 1 month head start from the market to buy a 2 month put, with the chance of being able to keep the money and also helps with my "stock not moving enough" problem.

I get the fact that I take a limited loss if the stock moves up. But I think it's already overpriced and I would lose almost the same from just buying a put.

But I am still having difficulty thinking multidimensionally.
More...

It’s not important that you know what every strategy is called but you should know cold where you make and lose money. If your expectation is that the stock is range bound until May then will drop, this might work well. It does make you short which is fine as that is what you want.
 
I want to stress that it's only a credit because of the structure. It's a debit in an equivalent call (or) put fly. The risk to the fly is the strike width less the credit. Outside the wings at expiration = max loss on fly.
 
Should said:
Thanks for pointing it out.
I initally thought that the resulting chart would be some kind of box spread, since the buying and selling is similar, hence i thought that the P/L chart must have been wrong. Being short Gamma just means that i'm getting money (credit) for the fly is that it?



Producing the delta means that the movement will be less effective as time progresses?

-

Also, volatility only affects my deferred puts but not the fly itself. If the market drops volatility will increase, helping me out right?
More...

For simplicity:

You're long the 90/100/110 call fly from 6.00 (4.00 credit on the iron fly).
You're long the 85P from 1.20

The max risk in the position is going to a trade between 85 and 90 on the underlying. Your delta position won't necessarily reflect it as the fly will be small long deltas against up to -50 deltas in the put, but your gamma will explode with time.

Keep an eye on your theta.

No, it's nothing like a box. A box is simply a long (short) synthetic at x and a short (long) synthetic at y. As such it's an arb on rates.
 
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