How do you maintain the slingshot hedge as mentioned in Carles Cottle's book

[Victor123]

Charles Cottle improves on the traditional zero cost collar like this:
1.Buy stock
2.But OTM put
3.Instead of selling an OTM call to finance the put, sell as many as necessary OTM call spread verticals to finance the put or generate a net credit.

But how to manage this position if the underlying goes to the moon? Do you just close out the spreads and ride out the underlying until you are satisfied?
Could you not have done the same with a traditional collar by buying back the short call?

What I am getting at is...how is the slingshot better than the traditional collar? It calims to be better as in it does not cap off the upside as much as a collar, but how so?

 

[xandman]

Haven't read him. Perhaps, the risk/reversal under hedges the underlying in terms of options contracts and hedges the delta instead.

You are deep in the theory rabbit hole with Cottle. But based on the depth your questions, I recommend you dial it back a bit. Re-reading Sinclair and Baird will do you more good. I am due myself. Unless of course, you are interviewing for a Quant or Derivatives job. They have books for that, too.

Good work though. That's a tough read. You have almost discovered cold fusion.

 

[xandman]

Oops. I confused Cottle with Gatheral. Happy reading then.

 

[Trader13]

Suggest you just send him a message and ask him. My impression of him is that he's very approachable and will probably respond to a sincere, well-formed question. He has an inquiry form on his website.

 

[sonoma]

Charles Cottle improves on the traditional zero cost collar like this:
1.Buy stock
2.But OTM put
3.Instead of selling an OTM call to finance the put, sell as many as necessary OTM call spread verticals to finance the put or generate a net credit.

But how to manage this position if the underlying goes to the moon? ..... It claims to be better as in it does not cap off the upside as much as a collar, but how so?

Long stock + long put = long call
If you add any number of call spreads to that synthetic long call, you're always net long 1 call
If your underlying goes to the moon, you're going to have a positive p/l

 

[Victor123]

Thank you all. Will need to reread the book. It really is one of the hardest books I have read.

 

[Victor123]

Oops. I confused Cottle with Gatheral. Happy reading then.

Did you mean this guy?
http://www.amazon.ca/The-Volatility-Surface-Practitioners-Guide/dp/0471792519
The title says 'practitioner', but looks too academic. I will read natenberg,mcmillan,sinclair,baird,cottle before reading this, if at all.
I love Cottle because of his focus on actual trading, and not page long Taylor series expansions.

Maybe Dynamic Hedging by Taleb, but again....too academic. I hope there is an easier way.

 

[Dolemite]

Thank you all. Will need to reread the book. It really is one of the hardest books I have read.

In the past I have traded the slingshot in real life and various other forms of it. Like sonoma said you are net long so your hope is that it goes to the moon. If you think of the position as a butterfly then it gives you an idea on how to adjust (or just trade the fly if you don't own the stock already). Later in the trade if the stock is between the short call and long call kicker is when you probably want to look at making some type of adjustment.

 

[Victor123]

Thank you very much dolemite and sonoma

 

[Dolemite]

Thank you very much dolemite and sonoma

From the slingshot, to the calendar collar, dynamic collar, dividend collar, poor man's collar, platinum collar, radioactive collar, ratio collar, short stock collar, enhanced collar etc. You name it and I have probably unsuccessfully traded it.