has Kim left the building?

Well, for the sake of the discussion, I did a little experiment. Entered SVXY 70/110 strangle at the exactly same time with OTM and ITM options (no 130 call because it's the same for both trades) and tracked it for few days.

Guess what? The P/L was NOT the same. The difference was not big, but ITM strangle was winning few dozen dollars more when it was winning and losing few dozen dollar more when it was losing. On average, the difference was around $60-80.

So while theoretically it might be the same, in reality it is not. I assume this is exactly the reason why he prefers the current setup.
 
Okay... give me the details... trade prices of all the options and as well time stamp and the price of the underlying at time of trade. Because I'm guessing that having a few seconds between trades in ITM options already gives a different price because of possible change in underlying.

EDIT. also... the trades you do don't reflect the correct theoretical price... because they are likely on the bid and ask
 
Last edited:
I don't care about theoretical price.. that's my point. There is theoretical price and there is a reality.

What you are missing once again is not only the initial trade setup, but also the adjustments. During the life of the trade, only the initial call is deep ITM. The put is around ATM, and the adjustments are made with puts around ATM or slightly ITM as well.

Both trades were initiated at the market close of January 30. Then tracked for few days till SVXY collapsed (no adjustments).
 
Kim Klaiman said:
I don't care about theoretical price.. that's my point. There is theoretical price and there is a reality.

What you are missing once again is not only the initial trade setup, but also the adjustments. During the life of the trade, only the initial call is deep ITM. The put is around ATM, and the adjustments are made with puts around ATM or slightly ITM as well.

Both trades were initiated at the market close of January 30. Then tracked for few days till SVXY collapsed (no adjustments).
More...

Okay, just show me the trade prices and I will have a look...
 
Kim Klaiman said:
OTM strangle at 1391, ITM strangle at 5902, based on closing prices on Jan.30.
More...

what are the individual prices in call and put?


In a 40 dollar box... the value should be 40 dollars minus interest on that box.. Interest would not be much, so let's forget about that.

But... how do you get to a 70-110 box worth 59.02-13.91=45.11? Should be max 40.

You see... that's not possible... there's no way that would be prices you can actually trade on. Well, you can... but you would have bought it at the ask prices wouldn't you? Not possible to sell it at that price. So I would be more than happy to sell you that box at 45.

If I would chose to buy either the ITM or the OTM strangle, I would be mad to buy the ITM, since the same construction in the OTM is way cheaper.

Buying the ITM 70-110 strangle at 59.02 results in affectively buying the OTM strangle for 19.02... while you could've bought it for 13.91.

So... buy the OTM.

Not saying you wouldn't make money buying the ITM, but you would make about 5 more with the OTM.... and that's simply because you are crossing bid/ask spread. That's my entire initial reasoning for buying OTM options instead of ITM's, since the b/a spreads are much smaller.
 
Last edited:
From our experience, there was no issue to get filled on SVXY near the mid even on ITM calls. The puts are ATM anyway, so the whole argument is not very relevant anyway.

As for the OTM strangle being cheaper - this is not really relevant since the position sizing is based on capital on risk, not the cost. The capital on risk is the same for both trades, hence we recommend 1 spread per 10k portfolio. Doing more with OTM options would cause excessive leverage, and we already know what is the outcome of excessive leverage when the trade goes against you.

We don't really disagree here about the general principle, but I believe the differences are just not significant enough to prefer one trade over another in this specific case.
 
Kim, no offence... but no....

How on earth is it not relevant if you get the same exact position by trading the OTM strangle for 5 dollars per option cheaper.... that's 10% lower cost base. For the same capital at risk (as you put it).

How you use more leverage with the OTM options is beyond me. If you would trade 50x ITM options... you just use 50x the OTM options instead... There's no more leverage on that compared to the ITM... You use less capital... yes, but just put that aside.

If you trade the ITM 70-110 on the numbers you gave, you're already down 10% compared to the OTM.

Can you please show me the exact prices of the individual legs you would have traded, both for ITM and OTM? Because you're just not seeing it... and however you put it, it's basically affecting your clients... since you're not doing them a favor by doing it the expensive way.
 
Once again - only one side of the strangle is ITM, the other side is around ATM.

Regarding leverage: the goal is to risk around $500 per 10k portfolio. Both trades risk the same amount. The fact that OTM strangle uses less capital only matters if you are using rest of the capital to buy more spreads. But doing this will increase the risk = more leverage. Otherwise the capital less matters, only the risk - which is similar in both trades.

We don't measure return on capital (unlike other services). We report return on the whole portfolio, with suggested allocation.
 
You must log in or register to reply here.
Back
Top