Riskarb's combo to fly conversion journal
- Thread starter riskarb
- Start date
As someone who is new to options, I have a quick question about the strategy of this journal. If I understand correctly, you enter a position by selling a staddle or stangle with the hope that it will decay and you can add the wings later at a cheaper price. Am I right so far? And if so, you are naked the short straddle position for a while. Kind of risky right? What if something happens in the stock before you can put on the wings?
I'll take a stab...
Short only straddles not strangles. Aim to get decay and IV mark downs on both straddle (body) and wings.
Yes, there is risk being naked. Period of time being naked is limited to one's personal risk preferences. I believe Riskarb looks to convert 7 days after initial position so you are naked for that period only.
Risk can be further mitigated by conservative position sizing and diversification. Reg-T should preclude one from taking on silly sizes, though that should not be the reason! Also, limiting VaR to within sensible parameters. Knowing where exposure lies (and when) and how to get flat or hedge at a moments notice is advised. If adverse move in underlying makes wing purchase untenable then buying back the straddle (offsetting) is preferable. In this instance, having a stop loss, mental or otherwise for these situations - just like any other position you have is probably wise.
The strategy is wide open for abuse but I'm sure most people are sensible enough to fully understand what they are getting into before employing it.
It is a highly risky strategy but partly due to the gamma characteristics, it is manageable risk IMO. Considering that long stock has unlimited downside risk (to zero anyway), I don't think this is too bad in comparison.
Good luck!
MoMoney.
Short only straddles not strangles. Aim to get decay and IV mark downs on both straddle (body) and wings.
Yes, there is risk being naked. Period of time being naked is limited to one's personal risk preferences. I believe Riskarb looks to convert 7 days after initial position so you are naked for that period only.
Risk can be further mitigated by conservative position sizing and diversification. Reg-T should preclude one from taking on silly sizes, though that should not be the reason! Also, limiting VaR to within sensible parameters. Knowing where exposure lies (and when) and how to get flat or hedge at a moments notice is advised. If adverse move in underlying makes wing purchase untenable then buying back the straddle (offsetting) is preferable. In this instance, having a stop loss, mental or otherwise for these situations - just like any other position you have is probably wise.
The strategy is wide open for abuse but I'm sure most people are sensible enough to fully understand what they are getting into before employing it.
It is a highly risky strategy but partly due to the gamma characteristics, it is manageable risk IMO. Considering that long stock has unlimited downside risk (to zero anyway), I don't think this is too bad in comparison.
Good luck!
MoMoney.
I tried out the new ToS paper trade thingy with the NDX 1700 combo - Donna is right, the virtual ToS NDX market makers are as tight-fisted as the real ones LOL.
Nearly $40K margin for 1 lot naked straddle on Reg-T LOL.
$120 P/L marked at close. Vols were still fairly bid-up.
Nearly $40K margin for 1 lot naked straddle on Reg-T LOL.
$120 P/L marked at close. Vols were still fairly bid-up.
