stradles vs. strangles

ludmil · Dec 27, 2005

Quote from smilingsynic:

I have sold straddles and strangles intermittently over the last three years. I sell only when I see vol either going nowhere or down (I don't sell every month). I have also sold otm puts when I do not mind if I were forced to buy the underlying.

I have soundly beaten the market, but selling vol is psychologically difficult if you do not like being wrong. One MUST be prepared to hedge, and to get chopped up when what appear to be newly trending markets go back to being trendless (right after you hedge).

I prefer selling straddles because of better liquidity and less risk in terms of a gap move. I do like to sell otm puts on indices and etfs to take advantage of the skew, but I keep gtc stop orders to protect myself (I do not trade for a living--I am an academic)

I keep a large cash reserve, because I do not want to be one of those losers who like Icarus flew too close to the sun of gamma and vega and then watched their accounts melt away and plunge. The mythological Greek Icarus would have sold as many straddles as his account would bear, cleaned up for six months, and then lost it all and more in a week.

I try to grind out a small profit every month while looking out for danger. Dull, but it works (usually) for me.

It is one of the most difficult ways I know to make an easy buck.

your strategy seems clever to me.what exactly do you mean with large cash reserve?how much?did you roll up(down)?

cnms2 · Dec 27, 2005

Try Lawrence McMillan's "Options as a Strategic Investment".

I'm not sure what you mean by "IV on indexes is almost higher than actual", but options' prices (hence their implied volatility) reflect market's consensus about the future. You might not agree with the market, and occasionally you may prove it wrong, so you should make your trading plan accordingly.

If you're talking about implied versus historical volatility, in my opinion you shouldn't give too much consideration to their relative values. Historical volatility looks at past underlying's movement, while implied volatility incorporates market's perception about the underlying's future movement and risk.

Quote from ludmil:

i started my studying some monts ago(not counting some years amateur directional trading besides stock picking).your answer is close to my opinion,but in the books i read i didn't find a lot of anwers-so i aks them here
so:IV on indexes is almost higher than actual.doesn't that mean that selling premium on them has +mat.expectation?

ludmil · Dec 27, 2005

Quote from cnms2:

Try Lawrence McMillan's "Options as a Strategic Investment".

I'm not sure what you mean by "IV on indexes is almost higher than actual", but options' prices (hence their implied volatility) reflect market's consensus about the future. You might not agree with the market, and occasionally you may prove it wrong, so you should make your trading plan accordingly.

If you're talking about implied versus historical volatility, in my opinion you shouldn't give too much consideration to their relative values. Historical volatility looks at past underlying's movement, while implied volatility incorporates market's perception about the underlying's future movement and risk.

i just finished reading mcmillan for 2 time

its mcmillans advice to use indexes for selling premium-because of lower risk.if i have understand him correctly IV on indexes is most of the time higher than the following actual volatility.so there should be profit-not much-if you ignore costs.but what is the real world?
or should i combine selling premium with directional opinion?

smilingsynic · Dec 28, 2005

Quote from ludmil:

your strategy seems clever to me.what exactly do you mean with large cash reserve?how much?did you roll up(down)?

Do not go hog wild on margin. I would be wary about selling more than 4-5K in premium per 100K.

I sell index premium (ES or NQ). I sometimes will sell otm puts on stocks I would not mind owning.

If the straddle goes against me I will hedge by buying/selling the underlying. I generally do not roll up/down.

smilingsynic · Dec 28, 2005

Quote from ludmil:

i just finished reading mcmillan for 2 timeits mcmillans advice to use indexes for selling premium-because of lower risk.if i have understand him correctly IV on indexes is most of the time higher than the following actual volatility.so there should be profit-not much-if you ignore costs.but what is the real world?
or should i combine selling premium with directional opinion?

Real world:

1. Past is no predictor of present.
2. Just because predicted vol (IV) on AVERAGE was higher than actual volatility does not mean that everyone, or most, who sold premium profited during that time.

I like selling index prem because of decreased gap risk (that explains lower IV) and ease of hedging (overnight).

traderob · Dec 28, 2005

Johnston: "Trading Options to Win" has useful chapters on straddles and strangles.

bigsid · Dec 28, 2005

You guys are talking the strategies I would like to implement. I've been daytrading for a year and have managed to break even (by luck). I'm fairly liquid in two accounts and I believe I can do all but naked deals with options. I think I would like to purchase an underlying security, then sell a call, use the cash to hedge with a put, pocket some hopefully, if stock tanks use put earnings to buy more stock. Am I heading in the right direction?

Sid

cnms2 · Dec 28, 2005

It seems you're planning to implement a collar that is a conservative strategy: low reward and low risk. It works also by shorting a stock, selling a put and buying a call.

Quote from bigsid:

You guys are talking the strategies I would like to implement. I've been daytrading for a year and have managed to break even (by luck). I'm fairly liquid in two accounts and I believe I can do all but naked deals with options. I think I would like to purchase an underlying security, then sell a call, use the cash to hedge with a put, pocket some hopefully, if stock tanks use put earnings to buy more stock. Am I heading in the right direction?

Sid

bigsid · Dec 28, 2005

Quote from cnms2:

It seems you're planning to implement a collar that is a conservative strategy: low reward and low risk. It works also by shorting a stock, selling a put and buying a call.

Thanks for the quick response. I would prefer to say short 500 AXP at 51 sell a jan52.50 put for 1.5 and buy a jan50 call for 1.75. Is this right?

Walther · Dec 28, 2005

Quote from bigsid:

You guys are talking the strategies I would like to implement. I've been daytrading for a year and have managed to break even (by luck). I'm fairly liquid in two accounts and I believe I can do all but naked deals with options. I think I would like to purchase an underlying security, then sell a call, use the cash to hedge with a put, pocket some hopefully, if stock tanks use put earnings to buy more stock. Am I heading in the right direction?

Sid

I do not think that this is the best strategy when you seem to be a risk adverse trader. Credit spread at reversal of underlying is IMO the best way to go.