Long straddle/stangle swap

[OptionSeeker]

I tried doing a search here, but didn't find what I was looking for. I saw more of double diagonals the other way around.

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 to or passes one of the short strikes (especially quickly) 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.

 

[OptionSeeker]

Sorry, I guess this is a double post - I thought it didn't accept my previous post.

 

[spindr0]

Quote from OptionSeeker:

I tried doing a search here, but didn't find what I was looking for. I saw more of double diagonals the other way around.

Double diagonals are more suited for situations where you're close to expiration, there has been an IV expansion in all months and you have an imminent news release that you expect will drive the IV down and the price away from the straddle's strike.

Quote from OptionSeeker:

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 to or passes one of the short strikes (especially quickly) 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?

IV contraction is a big problem since it affects the long straddle more than the short strangle.

Because of the nature of puts and calls, a move to the lower short strike is more problematic than to the upper strike.

Bear in mind that adjustments may improve your position's gain (real and potential) but they also run the risk of making things worse (underlying reverses). With that in mind, you can take profits by:

1) Roll the profitable diagonal another strike away from original price. (the actual problem strike causing the loss is the other side of the long month straddle)

2) Roll the OTM short strike in a strike turning the opposite side's diagonal into a calendar

3) Roll the ITM leg of the long straddle out a strike creating a long strangle

All choices depend on your subsequent outlook (hope?) for the underlying.

And FWIW, I think that a very far month is not the best choice for this strategy. It lowers the expected return. Use a 4-6 month leg.

 

[OptionSeeker]

Quote from spindr0:

Double diagonals are more suited for situations where you're close to expiration, there has been an IV expansion in all months and you have an imminent news release that you expect will drive the IV down and the price away from the straddle's strike.

I know I'm supposed to do a reverse calendar before the earnings release for the IV crush and gamma, but I (one of Cottle's suckers!) actually have done the opposite and traded several far out of the money double calendars and made small profit on most of them. One time the stock really blew out, but it was still only a slight loss. Maybe I just got lucky!

Quote from spindr0:
IV contraction is a big problem since it affects the long straddle more than the short strangle.

Because of the nature of puts and calls, a move to the lower short strike is more problematic than to the upper strike.

Bear in mind that adjustments may improve your position's gain (real and potential) but they also run the risk of making things worse (underlying reverses). With that in mind, you can take profits by:

1) Roll the profitable diagonal another strike away from original price. (the actual problem strike causing the loss is the other side of the long month straddle)

2) Roll the OTM short strike in a strike turning the opposite side's diagonal into a calendar

3) Roll the ITM leg of the long straddle out a strike creating a long strangle

All choices depend on your subsequent outlook (hope?) for the underlying.

And FWIW, I think that a very far month is not the best choice for this strategy. It lowers the expected return. Use a 4-6 month leg.

yeah, trying to predict far month IV just adds another variable, which can either be good or bad depending on the objective. I was shooting for about 6-7 months out, whichever month is available. Maybe I should stick to calendars only when I think there are significant discrepancies between IVs or I feel confident about about the IV being very low already.

Thanks for the ideas on adjusting.

 

[spindr0]

Quote from OptionSeeker:

I know I'm supposed to do a reverse calendar before the earnings release for the IV crush and gamma, but I (one of Cottle's suckers!) actually have done the opposite and traded several far out of the money double calendars and made small profit on most of them. One time the stock really blew out, but it was still only a slight loss. Maybe I just got lucky!

With reverse double calendars and reverse double diagonals, you need some combination of IV contraction and/or price movement in order to go positive. And the sooner, the better because time is not on your side.

What makes them more attractive closer to expiration is that the cost for the long straddle is less and therefore the maximum loss is much lower and the break even points are much narrower. But again, to be redundant, you have to have a pending event that you expect will drive the IV down and/or away from the center.

 

[OptionSeeker]

That makes sense, thanks. It would be nice to have an FDA drug decision announcement every week or so.