Spreads vs naked

[dagnyt]

Quote from osho67:

Thanks Mark. Good reply for education I will try iron condor as you have outlined.

Just be certain the trade suits YOUR comfort zone, not mine.

Most traders prefer to trade front-month iron condors. I'm in the minority on that.

Mark

 

[taowave]

Hi Mark,

I find your method of trading 100% acceptable.In fact that is how I exclusively traded while on the floor,and most of my non directional trades turn into some sort of butterfly(split strike) or condor...

At this point of my "trading career",I am soley interested in determining if I can trade directionally.I have traded dispersion books and vol books,and much like you I was pretty close to delta flat..

Good trading,

Tao

 

[jones247]

Has anyone used short strangles for an extensive period (i.e. 2+ yrs)? Although it's a potentially poor risk:reward trade with a lower probability of failure, particularly with european style options indices, I'm still fearful of including it into my trading plan. I've paper traded it with very good success, as setting stop losses and short term profit targets have given it an "appearant" edge. Nonetheless, I'm afraid of the "Black Swan"... I wish there was a better EDGE with which to apply this strategy... ANY SUGGESTIONS??

Wouldn't it be better to use stop losses rather than the two long legs of an IC, despite the potential gap that may occur preventing you from stopping out at the limit order price?

My paper trades were producing annualized "returns on margin" greater than 100+%. Typically, within a week or so I would be able to exit my positions.

James Cordier & Michael Gross of Liberty Trading (also authors of "The Complete Guide to Option Selling") are big proponents of this technique. My big disagreement with their premise is that they advocate selling about 3 months out. Personally, I'd rather sell the front month with about 3.5 - 4 weeks to expiration.

Walt

 

[jones247]

Although the IC would have a lower margin requirement, it takes much longer to realize the potential return on margin. Therefore, an IC demands that you remain open & exposed to the market for a longer time. Whereas, with a naked strangle, within a week or two you can realize 10% - 20% return on margin.


Walt

 

[dagnyt]

Quote from jones247:

Although the IC would have a lower margin requirement, it takes much longer to realize the potential return on margin. Therefore, an IC demands that you remain open & exposed to the market for a longer time. Whereas, with a naked strangle, within a week or two you can realize 10% - 20% return on margin.


Walt

Walt,

That sounds very naive. I know you know better. You cannot just make 10-20% within a week or two. If you are referring to such nice gains in recent weeks, do you realize that those gains came from a large decease in implied volatility (VIX fell from 80 to 40)? Imagine what the losses would be if VIX went the other way. And such a huge IV increase would be accompanied by a big market move. You'd have lost twice - once on the negative gamma and once on the volatility spike.

If concerned about a black swan, you must realize that the market is more likely to open down 20% than move down that much in one trading day. Why? Because there are more hours when the market is closed than open - and a major, market-moving event can occur at any time.

Even if you can hedge overseas, it may be too late.

The ONLY REAL protection against a black swan is a long option against your short option.

Strangles are for risk takers and no one else. And the authors you quote should know better than to suggest this disastrous strategy to the masses.

Here's your choice:

Sell the strangle or buy the iron condor.

The strangle gives you faster profits with the (unlikely) potential of a gigantic loss.

The IC gives you slower profits with limited losses.

Yes, it's best to be out of the market as long as possible when collecting time premium is your strategy. But, is being in the market for a shorter time worth the risk? Not for me. But I cannot answer for you.

Mark

 

[chrismontez]

"Strangles are for risk takers and no one else. And the authors you quote should know better than to suggest this disastrous strategy to the masses."

Although my trading of strangles has been minimal, and I don't know if this will hold true now with the market the way it is,
over the last bull run from 2004-2007 naked strangles on high flyers such as AAPL, RIMM, BIDU right before earnings have been a very profitable strategy. I followed AAPL and it would often take a big drop at the open on missing earnings by 1 penny or so, then work itself back up and run over the course of the next couple of days, making both selling the puts at the open the day after earnings, and selling the calls a week or so later profitable.

Other stocks I watched or traded didn't do as well with this strategy because the collapse in IV negated the small move from the earnings report. But if you picked the right stocks....

 

[dagnyt]

Quote from chrismontez:


Although my trading of strangles has been minimal... But if you picked the right stocks....

1) Any strategy works part of the time

2) Potential risk and potential reward must be compared. If you <i>like</i> the r/r for any specific trade, then go for it.

3) But, the potential for unlimited losses is unappealing for many traders.

4) One method for combating the risk of a huge loss is to do the trade small size

The general problem with promoting the sale of naked strangles in a book that may be read by inexperienced investors/traders is that they don't get the concept of trading just a few contracts when risk is large.

If a novice writes 5 strangles and makes a nice profit, then 10 strangles comes next. Soon it's 50 (or any number that is too large for the account) and that's when the unexpected happens.

To me, it's too risky. have sold options just prior to earnings news over the years, and it usually works out well. But today's markets are much more volatile than they were a short time ago, and it's no longer for me.

If you like the idea, especially now that market volatility <i>appears</i> to be settling down, then do it.

I merely have a big problem with Walt's idea that it's easy to grab a quick 10-20% in a couple of weeks.

Mark

 

[chrismontez]

"The general problem with promoting the sale of naked strangles in a book that may be read by inexperienced investors/traders is that they don't get the concept of trading just a few contracts when risk is large."

Sorry, I didn't specify these were long strangle positions and the initial post was refering to short strangles.

 

[spindr0]

[Other stocks I watched or traded didn't do as well with this strategy because the collapse in IV negated the small move from the earnings report. But if you picked the right stocks....

And then there's the concept of looking for an edge from capture of IV collapse.

A light bulb moment?

 

[jones247]

Quote from dagnyt:

I merely have a big problem with Walt's idea that it's easy to grab a quick 10-20% in a couple of weeks.

Mark [/B]

Point taken, I agree that it's pure gambling... there's no doubt that a major drop in IV is needed for such returns. IC is a much safer strategy.

Walt