Simple, Highly Profitable & Safe... Strangle-to-Collar
- Thread starter jones247
- Start date
Here's an example of this idea...
ES currently trading at $1360
1 contract - OTM Short Strangle [March] = 1395C ($1200) & 1320P ($1413).
SPAN margin requirement $3101 (since this is a strangle, I believe that only the greater of the put or call would be required to hold the margin requirement... this is a ROI of 84.2%!!! for ONE MONTH)... Naturally, the SPAN maintenance margin requirement will adjust as the market price moves.
If market moves from $1360 to $1395 before expiration, then do the following:
a) long 1 ES futures contract @ $1395
b) long 1 ES futures put contract at $1385 or thereabout
c) short about 3 put contracts way OTM @ about 1335 or 1340 to help cover the premium of the long put
"a)" & "b)" complete the legs with the original short call to create the collar. "b)" & "c)" creates the ratio credit spread.
In the improbable circumstance that the ES dramatically drops from 1395 down to 1335 within this short time frame (less than 1 month), then simply continue with the thread by creating a put collar against the 3 put contracts at 1335 with a call ratio credit spread.
Hopefully this helps...
Walt
ES currently trading at $1360
1 contract - OTM Short Strangle [March] = 1395C ($1200) & 1320P ($1413).
SPAN margin requirement $3101 (since this is a strangle, I believe that only the greater of the put or call would be required to hold the margin requirement... this is a ROI of 84.2%!!! for ONE MONTH)... Naturally, the SPAN maintenance margin requirement will adjust as the market price moves.
If market moves from $1360 to $1395 before expiration, then do the following:
a) long 1 ES futures contract @ $1395
b) long 1 ES futures put contract at $1385 or thereabout
c) short about 3 put contracts way OTM @ about 1335 or 1340 to help cover the premium of the long put
"a)" & "b)" complete the legs with the original short call to create the collar. "b)" & "c)" creates the ratio credit spread.
In the improbable circumstance that the ES dramatically drops from 1395 down to 1335 within this short time frame (less than 1 month), then simply continue with the thread by creating a put collar against the 3 put contracts at 1335 with a call ratio credit spread.
Hopefully this helps...
Walt
Why not simply buy the 1385 call? That would make your "simple" strategy a little less obtuse.
It will run you 10 points intrinsic, and won't ever make money because of the strangle, so whatever time premium you pay for that is a sure loss. In other words, you may as well close out the ATM short leg for the same time premium and call it a day.
Seems like the main thing here is that you're overwriting in the direction of the winning leg, which means you're drastically increasing position size when premium is way lower - asking for trouble if it whipsaws. Do you have to keep scaling this up at the same rate as the underlying goes back and forth?
Unless I'm misunderstanding the position somehow.
You're right, simply buying a 1385 call if the market reaches 1395 would probably allow me to exit with a breakeven, as the premuim received from both legs will offset the cost of the call at 1385. My exposure is that the market theoretically can retrace to the other leg. Although such a radical retracement in the given time frame on the S&P 500 is unlikely, it is still possible.
With my idea, I would preserve one of the two premiums received. However, sometimes discretion is the better part of valor. It may be better to implement a debit spread against the losing leg and exit with breakeven (as long as there is no retracement to the other leg), than trying to retain the premium on the winning leg.
Walt
With the current 1 STD of 100 points a month you have almost 90% probability for 50 points reversal at which point of time your margin is going to blow up. Also, there are a lot more effective strategies that allow you to hedge your short naked options without having to increase your size and margin.
Cheers
Cheers
thanks for posting the idea, the other posters are pretty much right though. Some probability analysis might come in handy. For example, figure out what 1 standard deviation comes to and see just how rare a 60 point move actually is with this vix and es level.
a simpler way to do it is to track atr, right now it is about 25 so a 60 point move is nothing. on 1/31 the range was over 51 that day alone. A strike 3.5 atr's away usually has a .15 probability of being hit with 4 weeks to go. it is prob higher right now, though.
a simpler way to do it is to track atr, right now it is about 25 so a 60 point move is nothing. on 1/31 the range was over 51 that day alone. A strike 3.5 atr's away usually has a .15 probability of being hit with 4 weeks to go. it is prob higher right now, though.
You're right, the market can easily reverse and drop 50 points; however, I'll have the resources to easily cover 5+ whipsaws of about 50 points. I could be wrong, but I dont't think the ES ever retraced by 50 points as many as 5 times in a given month. Usually it will trend in one direction or have only one major retracement.
QUOTE]Quote from MAESTRO:
With the current 1 STD of 100 points a month you have almost 90% probability for 50 points reversal at which point of time your margin is going to blow up. Also, there are a lot more effective strategies that allow you to hedge your short naked options without having to increase your size and margin.
Cheers [/QUOTE]
I guess my margin will increase substantially with multiple major reversals. What other "more effective strategies" are you referencing? I suppose that in lieu of a collar I could simply implement a credit ratio spread one strike price below the losing leg. Also, I guess I could close-out the losing leg ATM and re-enter two contracts to offset the loss of the close-out. Are there any better strategies to hedge against the loss of a naked strangle?