The MOST important factors in buying a straddle or strangle is the level of IV in the option premium and that once the trade is place, that the security MOVE away from the strike price. option volume and liquidity while important is secondary. you can find LOTS of option chains with high liquidity and volume but if the level of IV is too high, you are "dead" going into the trade.
Short strangles on stocks
- Thread starter falcon
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The MOST important factors in buying a straddle or strangle is the level of IV in the option premium and that once the trade is place, that the security MOVE away from the strike price. option volume and liquidity while important is secondary. you can find LOTS of option chains with high liquidity and volume but if the level of IV is too high, you are "dead" going into the trade.
Selling strangles is an ancient strategy...we employed it well in the 70's and 80's .... and is still "fine" IF you fully understand risk and how to adjust (but not over-adjust) your deltas and gammas.
A $40 stock, sell 35 and 45 strangle, near term. "What could go wrong? " LOL. Stock goes to 40.50 what do you do? What if it goes to $34? What I'm saying is have a plan to adjust as needed.
I never suggest putting on a strangle and just leave it alone, you could wake up on Saturday after expiry with a heck of a headache.
FWIW,
Don
A $40 stock, sell 35 and 45 strangle, near term. "What could go wrong? " LOL. Stock goes to 40.50 what do you do? What if it goes to $34? What I'm saying is have a plan to adjust as needed.
I never suggest putting on a strangle and just leave it alone, you could wake up on Saturday after expiry with a heck of a headache.
FWIW,
Don
No. You can't "over insure" with like or unlike products...you then lose whatever gain you may have had in the first place. Strangles are risky by nature, you just have to accept that if you're going to engage them.
Don
making adjustments to a straddle is gamma scalping. VIX calls will ONLY work with SPY or SPX straddles. if you are new to this, you are entering territory you dont understand and particularly if you don't understand how the level of IV impacts the selection and profitably of a straddle. respectfully I hope you lots have capital reserves (because if you don't have access to someone who's done this before), you are about to throw some $$$$ away unnecessarily
Go with an Iron Condor and buy further OTM call and put options to protect the short OTM options. No after-hours surprises and the maximum loss is capped, this position would NOT need any adjustments or hedging.
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Quote from ForexForex:
Go with an Iron Condor and buy further OTM call and put options to protect the short OTM options. No after-hours surprises and the maximum loss is capped, this position would NOT need any adjustments or hedging.
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respectfully, this is very inaccurate. Iron Condors are subject to fluctuating markets just like any other strategy and therefore will require adjustments on occasion as others. in addition Iron Condors, UNLIKE long straddles, are a negative vega trade needing falling IV to benefit them
I have to agree. Back in the late 70's and early 80's when we were helping to "invent" a lot of this (with Blair Hull of Hull Trading and Options Research), the straddles, strangles, butterflies, condors, iron condors... all this "stuff" - we were doing them for quarters, 50 cents, and full dollars... not having to compete for pennies and even sub-pennies. And when we add the HFT "instant hedge" groups out there...well, let me just say that you have to be really well informed, do the math well... and "almost never buy nothin'" - you lose the edge, however slim it might be.
For those of you who know what I mean when you price out the 3 way conversions and "reverse conversions" - knowing full well that there are no "over valued" or "under valued" options when looking at all 3 sides. All you can do is go with the IV and "hope" you are right going to the next expiration. Sell everything, and adjust by selling more...rarely if ever buy back anything (I know some of you have to based on account size limitations, and I respect and understand that)....
So important to graph your positions with 2 or 3 std deviations, and bite the bullet and ride the wave. A lot of money can still be made, but much smaller returns for more risk than the first 20 years of option trading.
In any event, listen to these pro's - don't get into anything you don't understand fully... have your plan in hand as they say.
All the best,
Don
VIX calls or call spreads would work with any diverse enough book in case of a meltdown. Which, all in all, what you probably want - you might like selling idiosyncratic risk premia of various stocks, but not necessarily want to be caught short convexity in a market-wide sell-off. The proper idea in trading volatility is to sell rich risk premiums and buy cheap(er) ones to protect yourself.