Seeking advice on writing (and covering) short options

N

noregrets

I have been experimenting with index-based double diagonals, long back-month straddles and short rolling front-month/week strangles—with the goal of collecting time premium from positive theta but staying long vega as well.

I am wondering if anyone has advice for how far out of the money to write the short options (I have read 30 deltas, or less?) and for when to cover the short options if the market turns against them (I have read when the underlying equals the short strike, or when the price is equal to twice the credit received?). I have found that this strategy works great—until it doesn’t—and you can lose weeks worth of premium in a sudden market move against you. Thank you for your time, I am a newcomer to the options community (have been trading full time for about 3 months) and have learned a lot from this forum.
 
I've been playing around with a similar strategy lately. Can't really offer 'advice' since I'm still learning as well, but some thoughts:

- I buy the longterm straddle and sell front month options against it like you. But I add an extra long straddle to increase the long vol exposure and decrease the short gamma exposure. So I use a 3/2 ratio of longs to shorts.

- I sell monthly options OTM, and weekly options ATM or CTM. This is to take advantage of the non-linear decay ATM, and the linear (or reverse linear) decay OTM.

- My monthly OTM strangles are usually the (12.5 delta call + 12.5 delta put) and/or the (25 delta call + 25 delta put).

That's all I got for now, still learning and tweaking. Any comments/suggestions are welcome.
 
Quote from Strangler:

I've been playing around with a similar strategy lately. Can't really offer 'advice' since I'm still learning as well, but some thoughts:

- I buy the longterm straddle and sell front month options against it like you. But I add an extra long straddle to increase the long vol exposure and decrease the short gamma exposure. So I use a 3/2 ratio of longs to shorts.

- I sell monthly options OTM, and weekly options ATM or CTM. This is to take advantage of the non-linear decay ATM, and the linear (or reverse linear) decay OTM.

- My monthly OTM strangles are usually the (12.5 delta call + 12.5 delta put) and/or the (25 delta call + 25 delta put).

That's all I got for now, still learning and tweaking. Any comments/suggestions are welcome.
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How is the OTM decay linear? I will only add that you're adding a lot of term-structure risk by going long the additional straddle. You've flattened gamma but theta as well (at 3/2). It's essentially isolated to a vol-bet. A straddled time spread is simply doubling up on the calendar. Nothing wrong with that, just stating the obvious.
 
Quote from atticus:

How is the OTM decay linear? I will only add that you're adding a lot of term-structure risk by going long the additional straddle. You've flattened gamma but theta as well (at 3/2). It's essentially isolated to a vol-bet. A straddled time spread is simply doubling up on the calendar. Nothing wrong with that, just stating the obvious.
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Thanks for the comments atticus.

- SLV is at $28.
The Mar22 28 call is 0.24. The Apr19 28 call is 0.64. - non linear
The Mar22 29 call is 0.03. The Apr19 29 call is 0.27. - reverse non-linear (my own term)

- "You've flattened gamma but theta as well (at 3/2). It's essentially isolated to a vol-bet."
You are correct and that is what I'm trying to accomplish.
 
Quote from Strangler:

Thanks for the comments atticus.

- SLV is at $28.
The Mar22 28 call is 0.24. The Apr19 28 call is 0.64. - non linear
The Mar22 29 call is 0.03. The Apr19 29 call is 0.27. - reverse non-linear (my own term)

- "You've flattened gamma but theta as well (at 3/2). It's essentially isolated to a vol-bet."
You are correct and that is what I'm trying to accomplish.
More...

So you just want to be long the vol-line on silver? I don't see the point of selling a three-cent call on SLV. lol I suppose I understand your term as the decay is essentially flat on a option at cab.
 
Quote from atticus:

So you just want to be long the vol-line on silver?
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I want to be long vol on silver with a longer time horizon (ie not a quick vol trade). And I'm trying not to get killed by the theta while I wait for a vol bounce.

Is there a better method?
 
Quote from atticus:

I don't see the point of selling a three-cent call on SLV. lol I suppose I understand your term as the decay is essentially flat on a option at cab.
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Agreed and I'm not selling that three-cent call. If I want to sell the 29 call I would use the monthly.
 
Quote from Strangler:

I've been playing around with a similar strategy lately. Can't really offer 'advice' since I'm still learning as well, but some thoughts:

- I buy the longterm straddle and sell front month options against it like you. But I add an extra long straddle to increase the long vol exposure and decrease the short gamma exposure. So I use a 3/2 ratio of longs to shorts.

- I sell monthly options OTM, and weekly options ATM or CTM. This is to take advantage of the non-linear decay ATM, and the linear (or reverse linear) decay OTM.

- My monthly OTM strangles are usually the (12.5 delta call + 12.5 delta put) and/or the (25 delta call + 25 delta put).

That's all I got for now, still learning and tweaking. Any comments/suggestions are welcome.
More...

Thank you for sharing your strategy--this is very informative. I personally have not used the more long than short strategy for this, as I would be worried about the theta cost of the extra vol exposure.

I am curious--at what point do you throw in the towel on a short option if the underlying starts moving against you in this scenario? I sense that this is probably more of an art than a science but any insight into your thought process there would be most helpful. Atticus I would be very curious to hear your thoughts as well on this, given the strategies you discuss on the forum such as the pitchfork and wide-strike ATM index butterflies.
 
Quote from Twinsen:

Do you buy long term longs at the money or out of the money? And sell shorts closer to money? Or your longs are in the money?

I asked about similar strategy here
http://elitetrader.com/vb/showthread.php?s=&threadid=260219

Buying itm strangle and selling atm short term strangle. But looks like it is not good. Well. Does your strategy differ from it?
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I buy long-term straddles ATM, and try to sell the short-term strangles centered ATM with the calls and puts generally between 20-30 deltas (although over time the underlying drifts from the long-term straddle strike).
 
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