My Option Dilema...!

T

TradStSOX

I wonder if I could get some help from the experts on the following option strategy?
My model sometimes issues long and short signals at almost the same time. Like for example there is a long signal with 5 ES points above the present price and a short one say 4 points below the existing price. The model cannot determine which will be hit first.
My alternatives are to go long and short by pairing at the same time, which can only be justified if one wanted to scalp mid range, since the same otherwise could be achieved by waiting for one of the signals to be hit first and then take the other one for the whole range of the 2 signals added.It's like saying OK I can go short or long and probably be profitable anyways but will adjust the timing and wait for 1 signal to get hit first and then add to the profit target too. Well, does make some sense...
The other approach I'm thinking is to use opposite direction naked options in and while waiting to for one to go ATM to take advantage of the time and IV decay of the other...
First, am I making sense, do the advanced experts also confirm this approach and if so which liquid options would give the best liquidity and also be available after hours.
Or
What are your suggestions please?
thanks
 
or like, since DIM options have little EV(premium), how about buying DIM puts and calls and as one of them will be converting to ATM to benefit from it's newly gained Extrinsic Value?
 
If an ITM option goes ATM then you lose money, you don't gain anything!

Buying an ITM call and put at the same time is equivalent to buying an OTM call and put. E.g. 90 call+100 put=100 call+90 put
 
Let me see if I understand this correctly.
DIM has little to no premium, right?
So if price at 100, then the 90 call and the 110 put should have no premium(little).
If the price moves down to 85, then the 110 put has collected 15 points for me but what happens to the 90 call?
It has lost the 10 points in the money it had right? and now has converted to a OTM 90 call at 5 points below it's strike price which should have some handsome extrinsic value or not?
Hence had I gone short and long the future at 100 at the same time my gains would have been 0 whereas I've gained 15 points from the put and lost 10 points to the call for a net gain of 10 and the 90 call has also still have some value.
Where am I wrong / confused on this strat.?
 
MTE is absolutely correct. ITM options have no advantage except you pay higher margin. Also, the Bid/Ask spreads are typically higher than OTM options.
 
Quote from TradStSOX:

Let me see if I understand this correctly.
DIM has little to no premium, right?
So if price at 100, then the 90 call and the 110 put should have no premium(little).
If the price moves down to 85, then the 110 put has collected 15 points for me but what happens to the 90 call?
It has lost the 10 points in the money it had right? and now has converted to a OTM 90 call at 5 points below it's strike price which should have some handsome extrinsic value or not?
Hence had I gone short and long the future at 100 at the same time my gains would have been 0 whereas I've gained 15 points from the put and lost 10 points to the call for a net gain of 10 and the 90 call has also still have some value.
Where am I wrong / confused on this strat.?
More...

Why complicate things. Pull up an option pricing model and stick the values and see what happens. Since this position is about delta netral and long gamma, a move of 15 points will result in a profit, assuming time and volatility haven't changed, but this is a huge assumption and, generally, it doesn't hold!

The strategy is called a gut strangle, using OTM options is called a strangle and is equivalent to the gut strangle in every aspect. In fact, as Maestro has pointed out the bid/ask spread is wider on ITM options and you tie up more capital due to the intrinsic value.

By the way, the amount of time value in a gut strangle is equal to the amount of time value in the strangle! That is, you pay the same amount of time value whether you buy 90 call and 110 put or 110 call and 90 put!
 
Assume XYZ @ 100 the 90 call and 110 put trading at both 10 making the position = 20. XYZ now moves to 85 and 110 put = 25 and 90 call = 0.05. Position has profit of ~$5. Just simply take the current underlying price + or - the price you paid for the position and that is your BE. Well at expiry anyways. Your example is a dynamic situation but you are using static inputs that lead to inaccurate conclusions. I'm just being long winded.
 
is that how much the 90 call will be worth, .05 when price at 85?
if so then yes the strat. does not make sense.
if the option still had a month life on it and it,s only like less than 6% away from the strike, wouldn't the option be worth a lot more though, say with 50%volatility?!

Quote from jj90:

Assume XYZ @ 100 the 90 call and 110 put trading at both 10 making the position = 20. XYZ now moves to 85 and 110 put = 25 and 90 call = 0.05. Position has profit of ~$5. Just simply take the current underlying price + or - the price you paid for the position and that is your BE. Well at expiry anyways. Your example is a dynamic situation but you are using static inputs that lead to inaccurate conclusions. I'm just being long winded.
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Quote from TradStSOX:

is that how much the 90 call will be worth, .05 when price at 85?
if so then yes the strat. does not make sense.
if the option still had a month life on it and it,s only like less than 6% away from the strike, wouldn't the option be worth a lot more though, say with 50%volatility?!
More...

Once again, use a pricing model and see what happens!
 
I may be wrong but I'm not sure that a 5 ES point move in either direction is going to move any index option by an appreciable amount especially with the trading ranges we are seeing these days.
 
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