Hedging the terminal distribution of a spread's PnL?

[xandman]

I am actually looking for some basic answers for the retail traders. Insights would be appreciated. I usually try to keep greeks evolution in mind through various timesteps, but that's because I am paranoid not so much as a thorough understanding of what I am doing.

Some examples are:

Deep ITM short flys. If it is past the point of probable return, why bother hedging the day to day fluctuations?

Answer: You can widen your delta tolerances and knowingly take on more gamma risk. Yes gamma risk is a dirty word, but then we are talking deep ITM short fly.

ITM Vertical: Why not buy an ITM vertical and periodically hedge. If the price remains steady, the drift effect is very similar to income generating short option strategy.

Answer: Actually, I am not sure why this isn't promoted by the option-selling/income generation promoters. Seems the natural drift of ITM options is a powerful force to take advantage of.

Thanks for reading, providing advice, or clearing up any possible misconceptions that I may be imparting.

 

[rmorse]

I'm not sure how to respond to the ITM short fly, since I don't hedge butterflys until they are near expiration.

With regard to ITM verticals, I can respond. ITM calls have wider markets and are less liquid than the OTM put spreads they replicate. Also, ITM options have early assignment risk and OTM puts don't. This can cause short term margin issues for a "retail" trader.The entry and exit cost to selling the OTM puts spread is much better than buying the ITM call spread.

Bob

 

[xandman]

I'm not sure how to respond to the ITM short fly, since I don't hedge butterflys until they are near expiration.
Bob

Is this because you piss excellence every morning. : D Or is this ...in some way..wasted effort?

Btw, I always had the impression that most mmakers books resembled short flys.

Roger on the ITM vert. Very practical and real world consideration. Thanks for a quick and timely reply!