Riskarb's combo to fly conversion journal

El OchoCinco · Feb 8, 2006

I cannot really complain about what happened to my ISRG position

Quote from cnms2:

I charted a real-life example for current QQQQ prices. QQQQ at $41.1, iron butterflies 37/41/45 vs. 40/41/42. As expected, the 37/41/45 will do better when IV drops, and when the price is narrow range bound. Both are the assumptions under which you'd put on such a position.

I think that there's actually no advantage to convert the 37/41/45 into 40/41/42. If you expect QQQQ to move toward the edges of the profitable price range is better to close the position, if you expect to stay in the middle of this range it's better to keep the wider butterfly. I understand the "getting into positive expectancy" argument, but ... it's a good chance to happen what happened (so far) to optioncoach's ISRG position.

momoneythansens · Feb 8, 2006

Quote from cnms2:

I think that there's actually no advantage to convert the 37/41/45 into 40/41/42.

You may have ommitted the margin aspects from consideration. Going from naked to fly free's up a lot of margin allowing you to reuse that margin for other combos to conversion. You can build up a much larger inventory of flies vs. naked straddles for the same margin. This is a key advantage of conversion over offsetting.

Comparing that with the ultra-wide fly to narrow fly conversion, there are similar benefits though not as pronounced. A side effect of Nick's ultra-wide fly approach is that you have purchased black-swan insurance up front! You could always try selling back the outer strangle to recoup some of the cost but it probably wouldn't be worth it in most cases.

it's a good chance to happen what happened (so far) to optioncoach's ISRG position.

:eek: ....but that's just one trade.

Buy1Sell2 · Feb 8, 2006

Quote from skanan:

Suppose I implement Riskarb strategy in IRA. I will need to create Iron butterfly instead. Assume that I use very wide wings first, wait until vol collapse, and buy closer wing later. Would this work out almost the same ?

My limit understaning of greeks told me that the wing price itself has even higher vol than the body so when vol collapse, the vol of the wings my collapse more than the body which may offset any edge I might have.

Thanks
Nick

you'll be spending too much in premiums I think. I'm not advocating this, but you would probably do just as well to sell a strangle and buy a farther
OTM strangle

RichardRimes · Feb 9, 2006

Quote from Buy1Sell2:

you'll be spending too much in premiums I think. I'm not advocating this, but you would probably do just as well to sell a strangle and buy a farther
OTM strangle

Having slept on this...I agree...in an IRA where you have no margin its allYOUR money and opportunity costs at stake. This conversion looks for a small edge which in purchasing the "tiny" wings initially I think eats up that "edge"...the best thing is to try it in your IRA paper account...I just think there are probably better plays in an IRA

El OchoCinco · Feb 9, 2006

I was assigned on my short ISRG PUT at $130 in the short straddle so today I am simply exercising my long $115 put. So I just have to wait until the last premium is shrunk out of the calls to realize the full credit of $2.40 * 3 spreads profit on the combo conversion to FLY.

Will check my screener again today but I do not like the inbetween period where we are, too close to FEB expiration and still a week or so to far from March expiration.

momoneythansens · Feb 9, 2006

Agree, am wating till next Thursday at the earliest to put on March straddles. More likely even week after that.

Quote from optioncoach:

I was assigned on my short ISRG PUT at $130 in the short straddle so today I am simply exercising my long $115 put. So I just have to wait until the last premium is shrunk out of the calls to realize the full credit of $2.40 * 3 spreads profit on the combo conversion to FLY.

Will check my screener again today but I do not like the inbetween period where we are, too close to FEB expiration and still a week or so to far from March expiration.

riskarb · Feb 9, 2006

Yeah, I'd neglected to mention that there is generally little opportunity in the final 10d to expiration. I use that time to adjust futures/spot hedges.

iloveoptions · Feb 9, 2006

Quote from optioncoach:

I was assigned on my short ISRG PUT at $130 in the short straddle so today I am simply exercising my long $115 put. So I just have to wait until the last premium is shrunk out of the calls to realize the full credit of $2.40 * 3 spreads profit on the combo conversion to FLY.

Will check my screener again today but I do not like the inbetween period where we are, too close to FEB expiration and still a week or so to far from March expiration.

Don't you wish you closed that trade last friday..in the mid 120's WITHOUT converting??? You had some nice profits at that moment. Don't let ISRG run away from you this time (just kidding).

El OchoCinco · Feb 9, 2006

Well a profit is a profit, I do not play the game of coulda woulda shoulda. It was short-lived in the mid $120's and dived pretty quick. I could have made even more money if I added more puts to the strangle as the stock was crashing too. But that was not the intent of the position.

$2.40 credit on an IRON FLY with a free ticket to make $17.40 is ok by me

.

Quote from iloveoptions:

Don't you wish you closed that trade last friday..in the mid 120's WITHOUT converting??? You had some nice profits at that moment. Don't let ISRG run away from you this time (just kidding).

iloveoptions · Feb 9, 2006

Quote from optioncoach:

Well a profit is a profit, I do not play the game of coulda woulda shoulda. It was short-lived in the mid $120's and dived pretty quick. I could have made even more money if I added more puts to the strangle as the stock was crashing too. But that was not the intent of the position.

$2.40 credit on an IRON FLY with a free ticket to make $17.40 is ok by me .

Yes. You have a point. So what's the next high I.V. play you're looking at??