Long straddle/stangle swap

O

OptionSeeker

I tried doing a search here, but didn't find what I was looking for.

I want to buy a very far month straddle, and short near month strangles continuously for theta decay. The danger is when the underlying goes or passes one of the short strikes because I'm gamma negative. I suppose another danger is if the volatility drops, so it's probably best when IV is not so high. Anyway, what are possible adjustments I should make should the price go to a short strike? Any suggestions? Thanks.
 
Two comments: It sounds like you have already discovered the two central drawbacks to this strategy!
#1. These plays are best when IV is below the historical average on the long straddle options, preferably close to historical lows. Then you have a chance to benefit from reversion to the mean as you write the short straddles, if it happens. If you buy high IV, you might wind up selling low IV and taking a fair bit of risk to make a low return, which is a lousy deal. Right now would not be the ideal time for this strategy. IV is still fairly high in historical terms, even though it has dropped from the extreme levels of the last few months.

#2. Hitting a short strike in the front month will probably be painful, depending on the time to expiration. Of course, you have a profit on the other side that you could use to buy options, or spreads to protect yourself, but going beyond the short strike will result in accelerating losses that could be devastating. I'd suggest you act before that happens. One of the keys to this strategy is to make certain that you carefully select strikes that are unlikely to be hit, but still generate a decent return. This is a difficult balancing art, to say the least. As always, risk and reward are the key competing factors.

Good luck!
 
Thanks John. I'm still trying to find out what kind of adjustments I feel comfortable doing for some of these types of trades. And yes, I usually try to pick low IVs based on historical IVs, but sometimes it just keeps going down!
 
I'm thinking of stock indexes (Indices?) and stocks that I have been trading for a long time and feel comfortable with their movements. I'm also testing other option strategies with small trades, and I have a whole bunch of historical options data that I still need to go through!
 
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