stradles vs. strangles

Walther · Dec 29, 2005

Ludmil,
Do no take it wrong way, but if you are not able to correctly judge direction of the underlying, there is no profitable naked premium writing strategy.
Forget all these condors and flies and concentrate on learning how to determine direction of a market . Then you write credit spread . If you are more then 65% right you can make 40-60% on your account.

skeweddude · Dec 31, 2005

Quote from smilingsynic:

I do not do bear call/bull put spreads (credit spreads). I do not think selling cheap gamma is prudent.

I am missing why this is selling cheap gamma? If you sell an ATM put in a Bull Put Credit spread you are selling an option that save for delta, should have the highest greek values while you are purchasing an OTM put with less gamma/theta/vega risk?

What am I not understanding?

Thanks, sd

smilingsynic · Dec 31, 2005

Quote from skeweddude:

I am missing why this is selling cheap gamma? If you sell an ATM put in a Bull Put Credit spread you are selling an option that save for delta, should have the highest greek values while you are purchasing an OTM put with less gamma/theta/vega risk?

What am I not understanding?

Thanks, sd

Many who set up "credit spreads" sell deep otm options and protect themselves by buying even deeper ones (not all do--some sell atm. They are not selling "cheap gamma"). Gamma is lower the further one goes away from the atm strike, so the gamma at these otm is low. In the case of a sharp market move, gamma will pick up, esp close to exp. The "dimes and nickels" (cheap gamma) sold may turn out to be quarters, dollars, and more.

Some put these positions on in tremendous size. Imo, they are doing the option equivalent of picking up pocket change on 95 near DC. What seems like easy money isn't (well, it is, until it isn't).

skeweddude · Jan 1, 2006

Quote from smilingsynic:

Many who set up "credit spreads" sell deep otm options and protect themselves by buying even deeper ones (not all do--some sell atm. They are not selling "cheap gamma").
Some put these positions on in tremendous size. Imo, they are doing the option equivalent of picking up pocket change on 95 near DC. What seems like easy money isn't (well, it is, until it isn't).

Ok, just wanted to make sure I was reading your posting correctly. The trade you describe I have never even thought of and wouldnt take on, as I completely agree with your analogy. Thanks for the quick response and the much needed visual of your view on the real world equivalent for selling cheap gamma

Since riskarb said "Amen" to your post I figured this was something I needed to understand.

sd

ludmil · Jan 7, 2006

Quote from Walther:

Ludmil,
Do no take it wrong way, but if you are not able to correctly judge direction of the underlying, there is no profitable naked premium writing strategy.
Forget all these condors and flies and concentrate on learning how to determine direction of a market . Then you write credit spread . If you are more then 65% right you can make 40-60% on your account.

it seems many don't understand that i'm not looking for a winning strategy.i'm was working good with market and stock predictions for over 8 years.i look to leverage a little my trading-thats why i try to learn the option strategies!
so -i rewrite my 1 question again:
assumung i think the underlying will go nowhere-should i choose strangles ot straddles?
i saw a lot of posters saying:don't sell cheap gamma-and i agree!
but ATM means usualy more comissions
so:is selling ATM worth the extra comissions in the long run?
please answers from posters with long term experience or statistics on that subject!!
thank you

horribilicus · Jan 7, 2006

I prefer to sell DOTM strangles (naked). These require a very liquid option chain, or else you'll get killed by the bid-ask spread. In my experience, "slippage" is much more important than commissions, assuming you're paying discount broker commissions such as IB or MBtrading charge.

I found it was much easier, psychologically, to do an entire round-trip when the initial play is to sell a strangle (naked). To me, the decisions about exit are a lot fewer and a lot more straightforward. I like to write strikes 2.0 standard deviations out of the money (on both sides), using four week implied volatility as the method of calculating standard deviation.

riskarb · Jan 7, 2006

I don't understand your comments about atm > otm commission, but I assume you're referring to a larger bid-ask spread in the straddle, which are often more competitive when calculating premium/spread -- premium received over bid-ask spread.

Straddles are preferable. You're selling downside gamma[slope] in the straddle, which reduces delta speed as the trade moves away from neutrality. The strangle-gamma is upside-sloping, increasing the delta's speed as it trades away from neutrality -- this can be referred to as "cheap gamma" due to it's acceleration as the underlying trades to either strike at -strike vol. Vol-smile is for another post, but otm options on individual equity options often exhibit *net* -skew when accounting for the blended, average vols received.

Straddles carry their max greek sensitivity when trading neutral[delta]; strangles carry the maximum when trading at either strike, which isn't what you're looking for when earning from volatility, stat[gamma-artifact] or implied. Why carry deltas when you're selling vegas?

Short combos are often traded to isolate the vega or theta[-gamma] distro-peaks, both of which occur at delta neutrality with the short straddle. You're receiving a potentially broader PnL distro, but with inferior curvature attributes with a strangle.

In practical terms, the straddle is preferable if you're trading a short gamma basket and you'd prefer to maintain unimodal gamma. They allow the trader to maintain +theta into any short gamma butterfly conversions. The strangle seller must either convert to a long gamma butterfly[body purchase] and invert modality, or trade a short gamma condor in lieu of a butterfly.

In the context of the question at-hand, the straddle is preferable for isolating vega, gamma and carries a superior risk-reward.

RichardRimes · Jan 7, 2006

I'm beginning to see what you mean. I have been selling the strangle's against stock I own thinking it saves comish (having to buy back stock and re-sell stock/straddle) but as I have been watching the trades and looking at the factors you mention I can see where the straddle IS superior RR... thanks for your thoughts

Quote from riskarb:

In the context of the question at-hand, the straddle is preferable for isolating vega, gamma and carries a superior risk-reward. [/B]

ludmil · Jan 8, 2006

Quote from riskarb:

I don't understand your comments about atm > otm commission, but I assume you're referring to a larger bid-ask spread in the straddle, which are often more competitive when calculating premium/spread -- premium received over bid-ask spread.

Straddles are preferable. You're selling downside gamma[slope] in the straddle, which reduces delta speed as the trade moves away from neutrality. The strangle-gamma is upside-sloping, increasing the delta's speed as it trades away from neutrality -- this can be referred to as "cheap gamma" due to it's acceleration as the underlying trades to either strike at -strike vol. Vol-smile is for another post, but otm options on individual equity options often exhibit *net* -skew when accounting for the blended, average vols received.

Straddles carry their max greek sensitivity when trading neutral[delta]; strangles carry the maximum when trading at either strike, which isn't what you're looking for when earning from volatility, stat[gamma-artifact] or implied. Why carry deltas when you're selling vegas?

Short combos are often traded to isolate the vega or theta[-gamma] distro-peaks, both of which occur at delta neutrality with the short straddle. You're receiving a potentially broader PnL distro, but with inferior curvature attributes with a strangle.

In practical terms, the straddle is preferable if you're trading a short gamma basket and you'd prefer to maintain unimodal gamma. They allow the trader to maintain +theta into any short gamma butterfly conversions. The strangle seller must either convert to a long gamma butterfly[body purchase] and invert modality, or trade a short gamma condor in lieu of a butterfly.

In the context of the question at-hand, the straddle is preferable for isolating vega, gamma and carries a superior risk-reward.

thank you riskarb!it seems you understood my question and gave me an exelent theoretical answer!
with strangle vs. straddle comissions(i mean combined-comissions + spread) i mean that in the case of strangle often you don't have to buy back the one leg to close.