Martingale With Strangles

D

DallasSteve

I am aware that Martingale strategies are frowned upon in trading circles and having backtested them extensively I understand why. However, I have an idea for going Martingale with limited risk and I wonder if (probably) it's been done before and what were the negatives.

I would run the system on indexes or mega caps (probably QQQQ). I would buy an OTM Call and Put. I would then Martingale trade the QQQQs within that Call/Put range. If the trade goes against me I can exercise the option to get out with limited risk. If it goes in favor I can exit with a modest gain and play again. I don't have to close the options on winning Martingale trades. If a trade goes far enough in my favor I can also take a profit on one of the options. And then start all over.

I'm starting to paper trade the strategy with an account at IB, but it's too soon to draw any conclusions.

Steve
 
Quote from DallasSteve:
.....it's been done before....
.....the negatives......
......conclusions.......
More...
1) ?.....you're "trading against the long-strangle".
2) You want to scalp the underlying profitably enough to offset time decay and volatility decay on the strangle.
3) It's a potentially viable strategy.
4) You may be better off just to scalp the underlying by itself because of the relatively high level of implied volatility. :cool:
 
1) ?.....you're "trading against the long-strangle".

Not necessarily. The underlying (eg QQQQ) can swing both ways, not just long. The hope is that the underlying will oscillate within the strangle enough times (over the life of the system) to take profits which beat the costs (obviously). The strangle is only there as a protection against the catastrophic losses which can occur in a Martingale system.

4) You may be better off just to scalp the underlying by itself because of the relatively high level of implied volatility.

I think that's what I'm doing. Again the strangle is just there as a protection against catastrophic Martingale losses and most of the time the put or call will not be executed but will stay alive for the next Martingale trade (unless it's hit).

It makes sense to me, but I know there are options trading costs. The protection isn't free.
 
Everytime your increase your position you also have to increase pour size in the options and I think this will be a huge cost. You most probably are gogin tot do this in periods of high vol also.
It's a good idea though. Maybe a first draft that need some improvements.
 
Strictly speaking, it's a limited risk situation since there are protective puts and calls in place. But there's a lot of room for loss up (or down) to the strike, particularly if you're bumping up the stock bet per the system.

Will you buy more cheap strangles initially and then ratchet up the stock if it moves against you? Or will you play catch up with the options? In the first instance, you'll have a lot more decaying asset with slippage to have to make up in your trading. In the latter, you'll have a somewhat constant loss range above and below all entries and a protracted directional move against you will rack up losses.

And if the trade went against you, you would not exercise the option to exit unless it went to parity (it's very close to expiration or you're deep ITM). Alternatively, you could take the profit on the ITM protective leg by rolling ... that would simulate a trading profit but obviously, it would restore the risk range to a new protective leg.

I would suggest that if you're trading, you try to trade clean without the encumbrance of the options. Scalp the moves and be out by the close. There's no easy money with these strategies.
 
Quote from total_keops:

Everytime your increase your position you also have to increase pour size in the options and I think this will be a huge cost.
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My plan is to determine a certain size limit before starting and set the strangle size and width accordingly. Maybe I set 8X trades as the limit to my underlying position. I would trade 1X, 1X, 2X, 4X and no more. I would buy 8X size puts and calls for the strangle and I would set their width based on how far I'm going to set each level of Martingale entries.

So if I was entering every 50 cent move the options would be about $2 below and above. Because the price will move over time I may go a little further off like 3 or 4 dollars so that I can re-use the strangle if it doesn't hit. As you say, the system needs some testing and tuning which is the stage I'm in right now.

Steve
 
Quote from DallasSteve:

1) ?.....you're "trading against the long-strangle".

Not necessarily. The underlying (eg QQQQ) can swing both ways, not just long.
More...

The term 'long strangle' does not refer to deltas.

It means you own the strangle (as opposed to having sold it).

Mark
 
Wayne

Thanks for that thread (it's so old QQQQ was still QQQ). It does look like he had the same idea. He said that he lost due to high commissions. My account is with IB who offers very low commissions and QQQQ offers very low spreads so I think it may work. If this doesn't work I may resort to selling options way out of the money.

It seems like the terminology straddle and strangle gets mangled sometimes. Wikipedia says a straddle is the same strike price while a strangle is different strike prices, usually out of the money. (Think straddling a fence or strangling a person) I think a strangle works better in this scenario because they are used to protect against what he called "3 Sigma events".

Steve
 
Quote from DallasSteve:

If this doesn't work I may resort to selling options way out of the money.
More...

That's quite a change. Going from buying strangles to selling OTM options, naked.


I surely hope your plan works because selling those cheap options is not a winning strategy.

Mark
 
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