if i start with both bull and bear 2:1 ratio spreads - short positions striked ATM - and the underlying moves to either wing strike - is there any reason not to cash out the profitable short and reestablish it at the wing strike? if the underlying moves far enough, one of the shorts will go to zero, so i'm assuming covering early is a theoretically intelligent thing to do, just wondering if anyone has guidelines on how soon to make the adjustment.
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Q: adjusting market neutral ratio spreads when underlying moves
- Thread starter damir00
- Start date
if i start with both bull and bear 2:1 ratio spreads - short positions striked ATM - and the underlying moves to either wing strike - is there any reason not to cash out the profitable short and reestablish it at the wing strike? if the underlying moves far enough, one of the shorts will go to zero, so i'm assuming covering early is a theoretically intelligent thing to do, just wondering if anyone has guidelines on how soon to make the adjustment.
If I understand correctly it's like selling a strangle and purchasing 2 strangles: a Wrangle?
example: underlying at 35
buy 2 put 30
sell 1 put 35
sell 1 call 35
buy 2 call 40
would that be a good example of your strategy?
and if it moves say to 40
you purchase back your put 35 at a profit and then sell a put 40. Is it what you are talking about?
you'd end up with
long 2 put 30
short 1 call 35
short 1 put 40
long 2 call 40
is that it?
If I understand correctly it's like selling a strangle and purchasing 2 strangles: a Wrangle?
example: underlying at 35
buy 2 put 30
sell 1 put 35
sell 1 call 35
buy 2 call 40
would that be a good example of your strategy?
and if it moves say to 40
you purchase back your put 35 at a profit and then sell a put 40. Is it what you are talking about?
you'd end up with
long 2 put 30
short 1 call 35
short 1 put 40
long 2 call 40
is that it?
that's exactly it. the assumption is the short is being covered at signficant profit and a fresh short taken on at the higher strike.
if the underlying stalls, it's a good move. if it goes up, it's a good move. if it drops, i'm short a put from a higher level - that's not so good. and it has further to go to get to the lower wing. but if i cover and don't reshort: underlying goes up, it's neutral. if it goes down, it's a good move. if it stays flat, also neutral.
i think covering is a good idea but reshorting at the higher strike is not such a good idea. i'm not used to visualizing these things, which is why i'm building my own options analyzer.
if the underlying stalls, it's a good move. if it goes up, it's a good move. if it drops, i'm short a put from a higher level - that's not so good. and it has further to go to get to the lower wing. but if i cover and don't reshort: underlying goes up, it's neutral. if it goes down, it's a good move. if it stays flat, also neutral.
i think covering is a good idea but reshorting at the higher strike is not such a good idea. i'm not used to visualizing these things, which is why i'm building my own options analyzer.
I ran a simulation and actually if you dont reshort you're theta exposed, and if it doesnt move you'll lose time value. Of course the furthest the expiration, the lesser the theta but also the lesser your gamma. In absolute value they move together.
If you reshort as long as it doesnt come back down to 32-33 you're ok.. lower than that you'll lose money. I simulated with 30 days options
If you reshort as long as it doesnt come back down to 32-33 you're ok.. lower than that you'll lose money. I simulated with 30 days options