Question and answer session
link: http://groups.google.com/groups?hl=...Z6.1560@nntp0.chicago.il.ameritech.net&rnum=1
'> Thanks for letting me pick your brains - this option thing has got me firmly in its grip and won't let go!
> My main strategy to date has been simply selling naked OTM calls on the FTSE on LIFFE. Not the most refined strategy and perhaps a little too amateur but pretty straight forward and so far so good. I close out if the premium doubles and sell front month mostly, and perhaps next month when10 days or less in front month. I typically let the options expire but will buy back
if goes to a point or so.
**You may want to consider buying your premium in a bit sooner and doing a rollover strategy in the deferred month.
I've constructed a set of empirical probability histograms for the
underlying showing the maximum intr-period increase inthe underlying over 35, 30, 25, 20 ... 10 days and use this to pick a strike at around 70 -80% probability. Because its a directional strategy I also wait for a couple of up days and look to sell above resistance as well. Not exactly a science. I also keep an eye on volatility and will use ATM IV to calculate the 1.5 SD strike as part of the above "guesstimation" process. I select a strike based on the above factors.
**Beautiful, the ATM straddle vol will give you a handle on how much negative edge is in the calls.
I'm aware that I'm selling negative call skew and that this is not ideal. I wondering whether I should maybe go with credit spreads instead on the call and put side and this has led me to close analysis of your approach with butterflies/condors.
**Refer to the above! The credit spreads will negate your skew disadvantage to a degree. Butterflies are a fantastic equalizer, plus you can trade directional(delta) butterflies dependent on strike selection. ATM butterflies are somewhat cheaper than neutral buttlerflies.
I'm trying to understand when you add the long combo to the short straddle/strangle - you said that you do so when the spread is at 1/2 of where it is currently trading. This confuses me.
**Bad explanation on my part. I sell the combo and watch the market in the completed butterfly. If I sell the 1300 straddle I'll keep an eye on the 1250/1300/1350 butterfly. If the butterfly is trading for 20.00 I will convert when the straddle and strangle decays enough to allow a 10.00 net debit on the complete butter.
I gather that you select the long strikes based on gamma/delta
considerations?
**Greek exposore/risks are small, excluding theta. Herein lies
**the inherent edge in long butterflies. The downside is the small
**(-gamma). I simply look at the $ r/r for various "widths", the wider the better(obviously). Delta plays the predominant role, but only in whether I will trade the butterlfy or offset the short premium.
> Do you go long on both sides at the same time or leg in over time as the market moves?
**Always as a combo, as I typically have significant edge in the short premium. It doesn't pay to trade direction as part of the process.
What months do you sell? Front only? How long do you let your short combo remain naked? Do you ever put the whole butterfly/condor on at the same time or only leg in?
**Always the front month(or 2). We let the straddle ride for as long as a week. I trade a significant amount of "net" butterflies, all inclusive. I trade 25% of my portfolio as net butterflies. I trade the new month on the expiration
**Friday of the expiring contract. Often I trade directional delta,
depending on the discount to the neutral butterfly. The neutral butter is always the highest debit. If I can buy a butter that satisfies my market outlook at a significantly cheaper debit, I will.
Must be a little nerve raking holding naked puts on stock indexes at times like this....
**The puts are not considered naked with simultaneous short calls. I realize that the risk is unlimited(lognormally-limited, but only theoretically), but
**I NEVER sell long delta. I always remain short the put-dominated(+skew) strike. So I always remain short delta. I will explain vega drift when I have moretime, but when you sell +skew(short delta as well) and the puts become ITM
the
**vol of the straddle can actually decrease with a selloff in the index. This is a result of the straddle being long delta and call dominated(in vol
terms)'.
link: http://groups.google.com/groups?hl=...Z6.1560@nntp0.chicago.il.ameritech.net&rnum=1
'> Thanks for letting me pick your brains - this option thing has got me firmly in its grip and won't let go!
> My main strategy to date has been simply selling naked OTM calls on the FTSE on LIFFE. Not the most refined strategy and perhaps a little too amateur but pretty straight forward and so far so good. I close out if the premium doubles and sell front month mostly, and perhaps next month when10 days or less in front month. I typically let the options expire but will buy back
if goes to a point or so.
**You may want to consider buying your premium in a bit sooner and doing a rollover strategy in the deferred month.
I've constructed a set of empirical probability histograms for the
underlying showing the maximum intr-period increase inthe underlying over 35, 30, 25, 20 ... 10 days and use this to pick a strike at around 70 -80% probability. Because its a directional strategy I also wait for a couple of up days and look to sell above resistance as well. Not exactly a science. I also keep an eye on volatility and will use ATM IV to calculate the 1.5 SD strike as part of the above "guesstimation" process. I select a strike based on the above factors.
**Beautiful, the ATM straddle vol will give you a handle on how much negative edge is in the calls.
I'm aware that I'm selling negative call skew and that this is not ideal. I wondering whether I should maybe go with credit spreads instead on the call and put side and this has led me to close analysis of your approach with butterflies/condors.
**Refer to the above! The credit spreads will negate your skew disadvantage to a degree. Butterflies are a fantastic equalizer, plus you can trade directional(delta) butterflies dependent on strike selection. ATM butterflies are somewhat cheaper than neutral buttlerflies.
I'm trying to understand when you add the long combo to the short straddle/strangle - you said that you do so when the spread is at 1/2 of where it is currently trading. This confuses me.
**Bad explanation on my part. I sell the combo and watch the market in the completed butterfly. If I sell the 1300 straddle I'll keep an eye on the 1250/1300/1350 butterfly. If the butterfly is trading for 20.00 I will convert when the straddle and strangle decays enough to allow a 10.00 net debit on the complete butter.
I gather that you select the long strikes based on gamma/delta
considerations?
**Greek exposore/risks are small, excluding theta. Herein lies
**the inherent edge in long butterflies. The downside is the small
**(-gamma). I simply look at the $ r/r for various "widths", the wider the better(obviously). Delta plays the predominant role, but only in whether I will trade the butterlfy or offset the short premium.
> Do you go long on both sides at the same time or leg in over time as the market moves?
**Always as a combo, as I typically have significant edge in the short premium. It doesn't pay to trade direction as part of the process.
What months do you sell? Front only? How long do you let your short combo remain naked? Do you ever put the whole butterfly/condor on at the same time or only leg in?
**Always the front month(or 2). We let the straddle ride for as long as a week. I trade a significant amount of "net" butterflies, all inclusive. I trade 25% of my portfolio as net butterflies. I trade the new month on the expiration
**Friday of the expiring contract. Often I trade directional delta,
depending on the discount to the neutral butterfly. The neutral butter is always the highest debit. If I can buy a butter that satisfies my market outlook at a significantly cheaper debit, I will.
Must be a little nerve raking holding naked puts on stock indexes at times like this....
**The puts are not considered naked with simultaneous short calls. I realize that the risk is unlimited(lognormally-limited, but only theoretically), but
**I NEVER sell long delta. I always remain short the put-dominated(+skew) strike. So I always remain short delta. I will explain vega drift when I have moretime, but when you sell +skew(short delta as well) and the puts become ITM
the
**vol of the straddle can actually decrease with a selloff in the index. This is a result of the straddle being long delta and call dominated(in vol
terms)'.
