Selling calls against Leaps

IV_Trader · Aug 21, 2005

Quote from smilingsynic:

For calendars, I prefer to use calls over puts (even though doing it with puts tends to be cheaper), but riskarb is right: you're just doubling up. Either way, you win on a little/no movement, and lose on a lot of movement.

Now if the calls that were being sold (1) were at a different strike than the calls that were part of the short straddle (2), that might be a different story (skewed options due to supply and demand). If the calls (and the puts that are part of the straddle) are from the same strike and expiration, then there is no edge.

Why not? Calls and puts at the same strike trade at the same implied volatility. If your computer model does not recognize that, then it is using incorrect/stale data. If they traded at different iv's, there would be a risk-free arb.

Besides, with just the calls, you are dealing with two b/a spreads and two commissions (short call, long call) ; with straddles you're dealing with four spreads and four commissions (short call, long call, long put, short put). And all for nothing.

Why would anyone want to do that?

I agree that both strategies will have the same results over a long time period,but not month by month my statedly sharpe ratio(piece of mind for me)will be lesser also do weekly ratio's adjustments according to changes in XYZ , Gamma and Theta.If I will go with Calls(or Puts) only,I will lose the flexibility here,especially if XYZ's move in the first week after position taken am not trying to convince you here,I am just showing what works for me(so far).

riskarb · Aug 21, 2005

Quote from IV_Trader:

I agree that both strategies will have the same results over a long time period,but not month by month my statedly sharpe ratio(piece of mind for me)will be lesser also do weekly ratio's adjustments according to changes in XYZ , Gamma and Theta.If I will go with Calls(or Puts) only,I will lose the flexibility here,especially if XYZ's move in the first week after position taken am not trying to convince you here,I am just showing what works for me(so far).

Tenor has zero impact. The greeks are locked. There is an insignificant distro advantage to being long the put time spread over the call into cheap spot, and conversely, short the call time spread over an equivalent put. Whether you adjust the position isn't a matter of equivalence, but I get your point.

IV_Trader · Aug 21, 2005

Quote from riskarb:

Tenor has zero impact. The greeks are locked. There is an insignificant distro advantage to being long the put time spread over the call into cheap spot, and conversely, short the call time spread over an equivalent put. Whether you adjust the position isn't a matter of equivalence, but I get your point.

Thanks for reply,riskarb , your opinion means a lot(I actually joined this site after reading your posts for a week, very impressive).BTW,most of my adjustments done by selling additional/free calls of lower strike when price gone down(and puts when price goes up)

riskarb · Aug 21, 2005

Quote from IV_Trader:

Thanks for reply,riskarb , your opinion means a lot(I actually joined this site after reading your posts for a week, very impressive).BTW,most of my adjustments done by selling additional/free calls of lower strike when price gone down(and puts when price goes up)

Thanks... I can see how it would improve the PnL variance. Good luck.

IV_Trader · Aug 22, 2005

Quote from riskarb:

Thanks... I can see how it would improve the PnL variance. Good luck.

riskarb , what do you think about this strategy?

1.Enter long ATM combo for XYZ(preferably with high HV?IV ratio) ONLY
at the last week of expiration when Gamma is very high.
2.Adjust delta neutral position by selling puts or calls as needed.
I understand , that mathematically I don't have any advantage here because Theta will neutralizing Gamma,but from my observations MM not always doing a good job of reducing combo's premium according to time decay(again , in the LAST week only).Sometimes there premium practically stays the same from Monday till Friday.
Thanks

riskarb · Aug 22, 2005

Quote from IV_Trader:

riskarb , what do you think about this strategy?

1.Enter long ATM combo for XYZ(preferably with high HV?IV ratio) ONLY
at the last week of expiration when Gamma is very high.
2.Adjust delta neutral position by selling puts or calls as needed.
I understand , that mathematically I don't have any advantage here because Theta will neutralizing Gamma,but from my observations MM not always doing a good job of reducing combo's premium according to time decay(again , in the LAST week only).Sometimes there premium practically stays the same from Monday till Friday.
Thanks

Gamma trading with wing sales? Selling atm or otm puts[calls] into a decline[rally]?

IV_Trader · Aug 22, 2005

Quote from riskarb:

Gamma trading with wing sales? Selling atm or otm puts[calls] into a decline[rally]?

no , just Gamma play ( with aggressive delta adjustments) in "almost free" of Theta affect environment.
ATM current month long straddle only.

Koppanyi · Aug 22, 2005

Hi,

Calendar spreads are said to be better than covered calls, because with this technique we can obtain leverage since one covered call position may be substitued with more calendar spreads. I'd like to start with it soon but I don't know some technical details.
Let's say my account have sufficient equity to establish such a calendar spread. I.e. my account has as much as amount of money that requires to buy one or two contracts of LEAP call options (short calls reduce this amount). If I exercised, will a short position be received by "rent" shares? Is the amount for buying the LEAP calls enough?

Thx