Reverse Iron Condors

newwurldmn · Mar 8, 2012

Quote from jkgraham:

Well I don't know the stock will get naughty "for sure" and even if the stock does move a lot after earnings if the implied volatility drops and the option prices drop that can cause the Straddles and Strangles to lose or breakeven while the RIC can still win but you would have to wait and exercise them instead of selling them back on the market for the gain. Thus it seems that it would be better to use weeklies and have less time to wait before execution. Again itâs trading return for a higher probability of success.

Is it a much higher probability of success? My impression of tail options have been that you aren't compensated well for the higher order effects of convexity. But the likelihood of those higher level convexities happening are low. If you are buying straddles you are betting that those higher level convexities are more likely to happen. So why sell something that caps that?

jkgraham · Mar 8, 2012

Quote from babutime:

Or maybe slightly deeper OTM options? Similar premium same size?

But deeper OTM options won't be the same size, the risk of failure would increase. That's an important trade-off.

Going deeper OTM would increase the risk to a point approaching the same as the Strangle and/or Straddle so then you wouldn't want to cap the gain with the RIC.

The goal is to increase the number of winning trades at the cost of lower returns.

jkgraham · Mar 8, 2012

Quote from newwurldmn:

Is it a much higher probability of success? My impression of tail options have been that you aren't compensated well for the higher order effects of convexity. But the likelihood of those higher level convexities happening are low. If you are buying straddles you are betting that those higher level convexities are more likely to happen. So why sell something that caps that?

What? Convexity?
If trade 'A' is successful if the price moves $10 and trade 'B' is succesful if the price moves $20. Trade 'A' will be successful more often than trade 'B'. What does "convexity" have to do with that?

ForexForex · Mar 8, 2012

Quote from jkgraham:

What? Convexity?
If trade 'A' is successful if the price moves $10 and trade 'B' is succesful if the price moves $20. Trade 'A' will be successful more often than trade 'B'. What does "convexity" have to do with that?

Convexity is a big word, makes people look smart by using big words.

jkgraham · Mar 8, 2012

Quote from ForexForex:

Convexity is a big word, makes people look smart by using big words.

I reckon so.

newwurldmn · Mar 8, 2012

Quote from jkgraham:

What? Convexity?
If trade 'A' is successful if the price moves $10 and trade 'B' is succesful if the price moves $20. Trade 'A' will be successful more often than trade 'B'. What does "convexity" have to do with that?

stock moves 0, A loses 3, B loses 3
stock moves 10, A makes $1, B loses 2
stock moves 20, A makes $2, B makes 1
stock moves 30, A makes $2, B makes $10

That's convexity.

Options are all about trading convexity: buying it or selling it.

kinggyppo · Mar 8, 2012

Quote from newwurldmn:

Is it a much higher probability of success? My impression of tail options have been that you aren't compensated well for the higher order effects of convexity. But the likelihood of those higher level convexities happening are low. If you are buying straddles you are betting that those higher level convexities are more likely to happen. So why sell something that caps that?

you have been here too long you are started to sound like Atticus...

babutime · Mar 8, 2012

And btw, if you think convexity is a "big word" then logically you should have been against it in 2007, 2008. Those who understood convexity, gained. Those who didn't- failed. And among those who failed, some managed to get your taxpayer dollars and go right back into ignoring it.

Now THAT is a conspiracy.

If you have the slightest idea how options are priced, convexity should always be on your mind.

As for reverse ICs, you're long convexity which allows a ton of profit but then you go ahead and cut its heads off.

When you win- you won't win as much. When you lose- you lose you lose almost the same amount because that short option won't gain the same amount as the long call loses- theta is higher for strikes closes to the underlying

jkgraham · Mar 8, 2012

Quote from newwurldmn:

stock moves 0, A loses 3, B loses 3
stock moves 10, A makes $1, B loses 2
stock moves 20, A makes $2, B makes 1
stock moves 30, A makes $2, B makes $10

That's convexity.

Options are all about trading convexity: buying it or selling it.

So would you be willing to trade 'A' instead of 'B' if it succeeded more often even though it paid less?

jkgraham · Mar 8, 2012

Quote from babutime:

When you lose- you lose you lose almost the same amount because that short option won't gain the same amount as the long call loses- theta is higher for strikes closes to the underlying

I think all three of these strategies, when used around earnings should be in and out of quickly. So if the stock doesn't move significantly after earnings then take the loss and bail. And yes they probably will all three lose about the same amount.

I take no one is interested in the Reverse Iron Condor. So do you prefer Straddles or Strangles?