Short Straddle Update

To compare apples to apples, you basically did 15 iron condors. You net premium per iron condor was 9.50 (9.50 premium times 15 iron condors times 50 equals $7125.00 total premium for the entire trade). I did one short straddle. My net premium per short straddle was 75.25 (75.25 times 1 short straddle times 50 equals $3763.00). Am I correct in this calculation?
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if we just compare the 2 strategies with same position size of 1 contract at expiration:

1) atm short straddle

<= 75.25 pt move = breakeven
<= 65.75 pt move = +9.5 gain
< 65.75-x pt move = + 9.5+x gain

2) otm iron condor
<= 109.5 pt move = breakeven
<= 100 pt move = +9.5 gain
< 100 pt move = + 9.5 gain


the loss is the same once exceediing the breakeven point for both strategies.

Main difference is iron condor has a 100 pt buffer but capped with a max profit of 9.5. While the straddle has a 35% lower buffer at 65.75 for the same 9.5 profit, but with a linearly increasing profit as the gap between initial strike and expiration price decreases.

I am really not sure how to calculate which has less risk / better strategy.

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Also what broker are you using? i think it's a pretty significant annoyance if you cant trade combos as the spread are pretty wide with those options while doing this. Despite all my complains about customer service, IB's option trader is pretty good and very flexible.
 
I am currently using the RCG's RAN platform (introducing broker is Global Futures). I used to use IB, and the execution of spreads, straddles, and any simultaneous orders is better with IB. I think that IB is able to do this, for they are a market maker.
 
Here is my weekly update. The maintenance margin is currently $6278.00. My profit to date is $638.90. To recap, I placed a short straddle (one contract per side) with the following legs: C1325 ES and P1325 ES. As of Friday's close (4-4-08), the ES settled at 1372.00.

I have been toying with a variation of the short straddle. Why not look at short straddle ratios? In other words, if I feel that the market will break out of its sideways trend and head upward, why not create a short straddle with a ratio of 3 puts to 2 calls. If the market is in a clear uptrend, why not use a ratio of 3 puts to 1 call. Once the trend slows down, go to a 3 put to 2 call ratio again. When the market resumes a sideways trend at the top, go back to a 1:1. Once the trend begins to move downward, then go to 3 calls and 2 put and them moving to a 3:1 ratio. Basically you will do the opposite for a downtrend. I still like to keep my eye on the VIX for the trend as a primary indicator. Then I look at a candlestick with volume chart to confirm. Looking back, once the market and the VIX indicated a double bottom, I would have done a short straddle with a ratio of 3 puts to 2 calls. Even if I am wrong, I still use the predetermined stop loss scale [% of total premium received] (60% for the first week, 50% for the second week, 40% for the third week, 30% for the fourth week (maybe expiration week), and 30% for the fifth week). Once the market breaks above 1400 and retraces back to 1400 without closing below it, then I would look at doing a short straddle with 3 puts to 1 call ratio. The VIX should confirm this upward trend by moving to lower levels and staying there. I use Bollinger Bands on the VIX as a guide.

This seems to be a better method that writing OTM puts and delta hedging with ES futures. When the market moved in the desired direction, the loss from the ES trades ate at my profits at a greater rate then using a call. While the ES profits did cover most of my losses from the OTM puts in a downtrend, I was consistently getting stopped out of my put trades--and showing an overall loss. I even tried to just cover the ATM/ITM puts, but I kept getting whipsawed as the market constantly chopped around the strike. For the February 08 trade, I did a covered put. This was successful since I put the trade on the Friday before Martin Luther King's birthday, when the market plunged 60 points. I closed out the trade on Tuesday with a profit. This was just a lucky trade, although my expectations at the time were for a downward move. So, to conclude, I like the idea of the short straddle ratio, depending on the trend of the market. Any thoughts are appreciated.
 
Quote from jwcapital:

This seems to be a better method that writing OTM puts and delta hedging with ES futures.
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It is. The futures hedge performs poorly when trading ratios on options to futures at >2:1 (synthetic straddle) due to edge loss which results from frequent hedging.

The upside is the averaging into a higher vol-mark as you hedge with short ES, but you're accumulating gammas [dgamma] and upside delta risk (whipsaw) as you approach the short strike. The whipsaw-risk may benefit from a reduction in vol, but no guarantees.
 
1) If you're becoming more sensitive to price direction, you should trade futures outright instead. Frequent option flipping and adjusting will become expensive.
2) You may get worse bid-ask quotes for "unbalanced straddles", i.e. 1-by-2 or 2-by-3, compared to what you'd get for a "balanced straddle", i.e. a 1-by 1.
3) You may be better off trading strangles whose strike prices are farther out-of-the-money.
4) Trade, then learn.
 
Quote from jwcapital:

Quote from newguy05:


"First, the short straddle is easiest to execute with my broker. Since my broker only accepts native GLOBEX orders, I cannot enter the short straddle as a spread nor can I enter the orders simulateously..
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FYI - Globex does accept native spread orders in ES options now up to 4 legs AFAIK.
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Couple of observations. One, to reply to the previous poster: The RAN platform will not allow the entering of a short straddle. I tried it, and the response I get is that market orders are not permitted on GLOBEX. The RAN does permit spreads between Futures, but not futures options. The rationale is that futures options spreads do require market order capability to be executed. Since Interactive Brokers is a major market maker, they can offer "synthetic" market orders to achieve execution of option spreads on GLOBEX.

Second, one concern I have with the short straddle. As one leg moves deeper ITM, the spread between the bid-ask widens tremendously. This week I saw a 10 point spread. If I needed to exit the straddle, I would be cheated. Anyone ever see this phenomenon. If so, is there a way to counteract it? Thanks for the input.
 
The weekly update: The April 1325C settled at 23.00; the April 1325P settled at 12.40; the June ES settled at 1335.50. My maintenance margin is $4,732.00; total profit to-date is $1,988.90. The short straddle is composed of one contract per leg. So far, I have not seen a loss in this trade. The lowest profit seen in the past three weeks was $250.00, and this occured when the ES approached 1388/1389. Also, I noticed that during a downward movement of the ES, profits accumulate much quicker than during an upward movement. Of course, the call has been ITM for most of the period. Next week is expiration Friday. I am anticipating allowing the OTM option to expire. In addition, I will probably cover the ITM option rather than closing it out. If there is sufficient liquidity and the closeout price as well as the commission to close is less than the commissions involved covering and being assigned, then I will close out the ITM option. I do anticipate simply covering, though. I appreciate any comments and would like to hear about the progress of newguy's and mark_nyc's trades.
 
JW thanks for the trade info and update. March 20th when trade was opened the VIX ranged from abt 30 (on open) to 26.5. On Apr 11th (update) range 22.5-23.5. Definitely trade has benefited from the decrease in VIX. Even when the direction went long against you the lower level in the vix seemed to offset the directional bias. OTH had the market dropped significantely below 1325 and the vix stayed above 30 I assume the trade would not have been as profitable.
 
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