Long term Condors B/flies

johnk49 · Mar 6, 2004

Most pro's stress putting on these spreads near term obviously to benefit from time decay.It occured to me,what would be the advantages disadvantages of doing these long term?For instance,if you were to put on a B/fly on the Dec 05 SPX you would collect a nice premium up front and continue to benefit whenever the index swung one way or the other by altering the spreads over a nearly 2 year period.

Is my thinking wrong here?

riskarb · Mar 6, 2004

Quote from johnk49:

Most pro's stress putting on these spreads near term obviously to benefit from time decay.It occured to me,what would be the advantages disadvantages of doing these long term?For instance,if you were to put on a B/fly on the Dec 05 SPX you would collect a nice premium up front and continue to benefit whenever the index swung one way or the other by altering the spreads over a nearly 2 year period.

Is my thinking wrong here?

They're short gamma, so the larger credit(iron fly) is often small compensation for the added risk of trading outside the wings. You do have some marginal short vega, so in an expected volty decline it may have some merit, but not much.

Trader's like to put them on as short-term plays since the overall greek exposure is small, they simply don't move much if there's some time to expiration. The gamma is small therefore so is theta.

riskarb

Hello_Dollars · Mar 6, 2004

Quote from johnk49:

Most pro's stress putting on these spreads near term obviously to benefit from time decay.It occured to me,what would be the advantages disadvantages of doing these long term?For instance,if you were to put on a B/fly on the Dec 05 SPX you would collect a nice premium up front and continue to benefit whenever the index swung one way or the other by altering the spreads over a nearly 2 year period.

Is my thinking wrong here?

I assume you're talking iron flys/condors since you mentioned generating a credit and being theta positive. Well, the flip side of the positive theta on those positions is the large gamma and vega risk. Now while the gamma risk would be less with the longer term iron fly/condor as compared to the traditional front month iron given the much lower positive theta, the vega risk would be quite substantial. And with vol at levels not seen since '96, I for one would not want to sit with a position with a large negative vega for 7-8 months.

johnk49 · Mar 6, 2004

Quote from Hello_Dollars:

I assume you're talking iron flys/condors since you mentioned generating a credit and being theta positive. Well, the flip side of the positive theta on those positions is the large gamma and vega risk. Now while the gamma risk would be less with the longer term iron fly/condor as compared to the traditional front month iron given the much lower positive theta, the vega risk would be quite substantial. And with vol at levels not seen since '96, I for one would not want to sit with a position with a large negative vega for 7-8 months.

Thanks for the comments lads.

HD your comments on vega seem to condradict a paragraph from Paul Forchione's book Trading Options Visually.

"The strategy of initiating a butterfly trade is intended to"see the trade through"to expiration,so the Vega factor is not important.Vega is never important if your trade horizon is expiration because IV means nothing at expiration.At expiration the price of the underlying futures in relation to the strike price of the options in your position is the only thing that matters".

Could you please enlighten me?

Hello_Dollars · Mar 6, 2004

Quote from johnk49:

Thanks for the comments lads.

HD your comments on vega seem to condradict a paragraph from Paul Forchione's book Trading Options Visually.

"The strategy of initiating a butterfly trade is intended to"see the trade through"to expiration,so the Vega factor is not important.Vega is never important if your trade horizon is expiration because IV means nothing at expiration.At expiration the price of the underlying futures in relation to the strike price of the options in your position is the only thing that matters".

Could you please enlighten me?

And we'll all be dead eventually.

Sure, if you're willing to tie up capital with a max loss position for 7 months, then go ahead and ignore the Greeks. Personally, that's not how I trade options. But I've never written a book, so if I were you, I'd ignore my advice and instead listen to Paul Whateverhisnamehis. He sounds like he's really onto something.

johnk49 · Mar 6, 2004

Quote from Hello_Dollars:

And we'll all be dead eventually.

Sure, if you're willing to tie up capital with a max loss position for 7 months, then go ahead and ignore the Greeks. Personally, that's not how I trade options. But I've never written a book, so if I were you, I'd ignore my advice and instead listen to Paul Whateverhisnamehis. He sounds like he's really onto something.

God,I only asked a"what if"question!!

Ok this guy may not be God but you would think that he at least knows more than me(a novice),Paul Whatshisname that is.

Hello_Dollars · Mar 6, 2004

Quote from johnk49:

God,I only asked a"what if"question!!

Ok this guy may not be God but you would think that he at least knows more than me(a novice),Paul Whatshisname that is.

Please refrain from taking Riskarb's name in vain.

riskarb · Mar 6, 2004

Quote from Hello_Dollars:

Please refrain from taking Riskarb's name in vain.

riskarb

Maverick74 · Mar 6, 2004

Quote from johnk49:

Most pro's stress putting on these spreads near term obviously to benefit from time decay.It occurred to me,what would be the advantages disadvantages of doing these long term?For instance,if you were to put on a B/fly on the Dec 05 SPX you would collect a nice premium up front and continue to benefit whenever the index swung one way or the other by altering the spreads over a nearly 2 year period.

Is my thinking wrong here?

John,

Let me take a stab here. First off, I'm not a huge fan of condors so keep that in mind as I respond. Making adjustments to condors is not easy over the short term and over the long term, they would require numerous adjustments. Here is how I view adjustments in general. The more adjustments a position requires, the more chances you have to be wrong about making that adjustment. So a long term position is going to require a lot of high maintenance.

Now obviously one of the benefits of the condor is the long theta. However, with a far month position like this one, you don't really have much time decay working for you. It will eventually, but you will have to wait a long time for that to happen.

I wouldn't be too worried about the short vega because you can always choose plays that have very high vol and that will more then likely come in over time.

Let me make a suggestion. Perhaps what you could do is put on a long term straddle or strangle of some sort and put the fly or condor on the front month and just keep adding fly's or condors each month to your long term straddle. There are numerous variations that you could use.

I hope this helps. If you have any other questions, let me know.