Thanks...makes sense in that context...
stradles vs. strangles
- Thread starter ludmil
- Start date
Ludmil,
IMHO no one strategy is better than any other. It depends on what your market sentiment is and what you think is going to happen in terms of both volatility and direction. There are infinite number of ways to play both iron condors and butterflies so it's not really possible for me to say which one is better as a generalization.
If you ignore the wings, you are comparing straddles vs strangles...which is your original question lol.
If you are short options/gamma, some would argue that it is better to be short the straddle rather than the strangle in most instances. The law of diminishing returns seems to apply when comparing the premium for the gamma risk you are taking on if you compare stradles vs. strangles i.e. you get the best premium for risk with a straddle and hence the winged version of the straddle being a butterfly is the best limited risk strategy for being short premium in a market neutral fashion. You have to make your own mind up whether you agree with this or not - look at a few trades.
The flip side to this is that you have a smaller probability of being profitable with straddles vs. strangles.
In summary, you can look at it from two points of view: 1) Probability of winning/wide profit zone 2) Risk/reward profile.
You can have a wide IC with high probability of winning but a horrendous risk/reward profile and vice versa.
For some traders, they simply won't go short gamma other than ATM or NTM and hence go with butterflies, strikes permitting, or very narrow ICs.
For other traders, they simply won't go short options anywhere near the money giving them a very wide profit zone.
Other traders take a view depending on the situation and the day of the week!
Suggest you paper trade both these strategies for a while to get a feel for how the positions behave over time and what kind of adjustment options you are likely to have otherwise I could go on for a day or two....
MoMoney.
IMHO no one strategy is better than any other. It depends on what your market sentiment is and what you think is going to happen in terms of both volatility and direction. There are infinite number of ways to play both iron condors and butterflies so it's not really possible for me to say which one is better as a generalization.
If you ignore the wings, you are comparing straddles vs strangles...which is your original question lol.
If you are short options/gamma, some would argue that it is better to be short the straddle rather than the strangle in most instances. The law of diminishing returns seems to apply when comparing the premium for the gamma risk you are taking on if you compare stradles vs. strangles i.e. you get the best premium for risk with a straddle and hence the winged version of the straddle being a butterfly is the best limited risk strategy for being short premium in a market neutral fashion. You have to make your own mind up whether you agree with this or not - look at a few trades.
The flip side to this is that you have a smaller probability of being profitable with straddles vs. strangles.
In summary, you can look at it from two points of view: 1) Probability of winning/wide profit zone 2) Risk/reward profile.
You can have a wide IC with high probability of winning but a horrendous risk/reward profile and vice versa.
For some traders, they simply won't go short gamma other than ATM or NTM and hence go with butterflies, strikes permitting, or very narrow ICs.
For other traders, they simply won't go short options anywhere near the money giving them a very wide profit zone.
Other traders take a view depending on the situation and the day of the week!
Suggest you paper trade both these strategies for a while to get a feel for how the positions behave over time and what kind of adjustment options you are likely to have otherwise I could go on for a day or two....
MoMoney.
I agree with Mo, one strategy is not better than the other and I doubt the board has a preference either way overall. Some prefer the butterflies while others prefer the IC and still others choose whichever best fits their needs depending on their analysis of the underlying asset. You need to trade what works best for you and your own trading style.
thank's for the extensive answer!i agree with you on many things-but not all
first i need to clarify my pozition,because it seems most here don't understand my intention.
i'm relative new to options,but not to investing and how markets work.i'm not looking for a winning strategy(i agree that such a thing doesn't exist-and if there are some they shouln't be widely known).of course to win you have to predict right the stock behavior and choose the apropriate strategy.
my intention here was to sort out bad strategies.you must agree that some doesn't work good for reasons of comissions,risk involved etc. and can be replaced with better ones(the easyest exaple -comparing naked put sales vs. covered call writing-excluding some spezial situations)
second intention-to find out the set of conditions when a strategy works better(or worse) as another.
paper trading isn't the answer-there are a lot strategies that work good for some time and then comes the disaster!
i'm not so interested to compare strategies,but to compare philosophy and matem.expectations behind the strategies
i know many can write for weeks on that topic but i thing we will be in the market for long time-we have time
so let me rewrite my first question:
what is your phylosophy for selling time and WY DO YOU THINK IT SHOULD WORK!
Ludmil,
Rooting out bad strategies is a sensible idea. However, I'm not convinced there is neccessarily such a thing as a bad strategy, certainly as far as the strategies we're discussing are concerned. I'm more inclined to admit that there is room for mis-using/mis-managing/mis-understanding the characteristics of any given strategy, in which case it is more dependent on the traders knowledge,skill and intent rather than the strategy itself.
As you admit, there are cases where a covered call is better than the synthetic equivalent naked put. So even in that case it seems you cannot root the covered call out as a bad strategy. It depends on your intent and how you got to your position. Many traders build and adjust their positions over time, thus resulting in new positions. So in the simple example of a covered call, the trader might have ended up in that situation via a round about way e.g. if he/she ended up with long stock in inventory and wanted to adjust into a naked put profile I'm sure you will agree it would be more cost efficient to write a call rather than liquidate the long stock and then write the put.
This can be extended to any other position. There are an infinite number of ways that one can end up in a butterfly or condor position other than just opening the position "as is". Indeed, some would argue that you are just compounding the negative expectancy of trading options by opening positions outright in that manner - negative expectancy due to commissions and slippage etc. but I digress.
As for finding out the set of conditions when one strategy works better than another, the key to this is understanding what the strategy or position "wants". I like to use the position greeks to tell me what it "wants". So to answer the question, if you are able to get a feel for the hedge parameters of your position you will have a better understanding of which strategy works best under which conditions - this was my main intent for suggesting the paper trading - to get a feel for what each strategy "wants" to happen. To avoid going round in circles on this point, I acknowledge that paper trading has it's limitations but I'm afraid I have no other suggestion other than stress testing.
As for my philosophy for "selling time", well I'm a little schizophrenic in that department. I will look at each situation individually, consider my circumstances, consider my existing inventory, consider my portfolio parameters, consider my position sizes, consider how much time I want to spend trading etc. I'm quite happy doing both (iron) butterflies and (iron) condors - long the wings, long theta. The only general rules I can impart from my philosophy are that I don't go short gamma more than 40 days out from expiration and I make sure I fully understand where my exposure is for each position and my maximum risk.
Happy trading!
MoMoney.
Rooting out bad strategies is a sensible idea. However, I'm not convinced there is neccessarily such a thing as a bad strategy, certainly as far as the strategies we're discussing are concerned. I'm more inclined to admit that there is room for mis-using/mis-managing/mis-understanding the characteristics of any given strategy, in which case it is more dependent on the traders knowledge,skill and intent rather than the strategy itself.
As you admit, there are cases where a covered call is better than the synthetic equivalent naked put. So even in that case it seems you cannot root the covered call out as a bad strategy. It depends on your intent and how you got to your position. Many traders build and adjust their positions over time, thus resulting in new positions. So in the simple example of a covered call, the trader might have ended up in that situation via a round about way e.g. if he/she ended up with long stock in inventory and wanted to adjust into a naked put profile I'm sure you will agree it would be more cost efficient to write a call rather than liquidate the long stock and then write the put.
This can be extended to any other position. There are an infinite number of ways that one can end up in a butterfly or condor position other than just opening the position "as is". Indeed, some would argue that you are just compounding the negative expectancy of trading options by opening positions outright in that manner - negative expectancy due to commissions and slippage etc. but I digress.
As for finding out the set of conditions when one strategy works better than another, the key to this is understanding what the strategy or position "wants". I like to use the position greeks to tell me what it "wants". So to answer the question, if you are able to get a feel for the hedge parameters of your position you will have a better understanding of which strategy works best under which conditions - this was my main intent for suggesting the paper trading - to get a feel for what each strategy "wants" to happen. To avoid going round in circles on this point, I acknowledge that paper trading has it's limitations but I'm afraid I have no other suggestion other than stress testing.
As for my philosophy for "selling time", well I'm a little schizophrenic in that department. I will look at each situation individually, consider my circumstances, consider my existing inventory, consider my portfolio parameters, consider my position sizes, consider how much time I want to spend trading etc. I'm quite happy doing both (iron) butterflies and (iron) condors - long the wings, long theta. The only general rules I can impart from my philosophy are that I don't go short gamma more than 40 days out from expiration and I make sure I fully understand where my exposure is for each position and my maximum risk.
Happy trading!
MoMoney.
Quote from ludmil:
thank's for the extensive answer!i agree with you on many things-but not all
first i need to clarify my pozition,because it seems most here don't understand my intention.
i'm relative new to options,but not to investing and how markets work.i'm not looking for a winning strategy(i agree that such a thing doesn't exist-and if there are some they shouln't be widely known).of course to win you have to predict right the stock behavior and choose the apropriate strategy.
my intention here was to sort out bad strategies.you must agree that some doesn't work good for reasons of comissions,risk involved etc. and can be replaced with better ones(the easyest exaple -comparing naked put sales vs. covered call writing-excluding some spezial situations)
second intention-to find out the set of conditions when a strategy works better(or worse) as another.
paper trading isn't the answer-there are a lot strategies that work good for some time and then comes the disaster!
i'm not so interested to compare strategies,but to compare philosophy and matem.expectations behind the strategies
i know many can write for weeks on that topic but i thing we will be in the market for long time-we have time
so let me rewrite my first question:
what is your phylosophy for selling time and WY DO YOU THINK IT SHOULD WORK!
it's simple-my time is not infinite-thats why i want to concentrate on knowing well strategies that work often.a handfull of stocks and handfull of srtategies is better than miriads of choises you don't understand well!
reading mcmillan i had the impression that selling premium is not a good idea at all(most of time).but as a part of a more sofisticated strategy i want to analyse selling stradles on indexes!
is it a viable strategy by itself or is it intendet only as a hedge!
Lol. I seem to have reached the limit of my explanatory powers here.
ANY strategy will work often under the right circumstances. Unfortunately, I don't know another way to explain this.
There is no set of rules saying one strategy is intended for one purpose e.g. hedging and another strategy is intended for another purpose.
I sense that you want a simple yes/no answer, if that is the case, then allow me to oblige:
Yes, the ***** strategy is viable by itself under the right circumstances and if you are right about your predictions for direction and volatility. (Insert name of strategy as required)
There are numerous traders and hedge funds that routinely make money selling premium, myself included.
Good luck!
MoMoney.
ANY strategy will work often under the right circumstances. Unfortunately, I don't know another way to explain this.
There is no set of rules saying one strategy is intended for one purpose e.g. hedging and another strategy is intended for another purpose.
I sense that you want a simple yes/no answer, if that is the case, then allow me to oblige:
Yes, the ***** strategy is viable by itself under the right circumstances and if you are right about your predictions for direction and volatility. (Insert name of strategy as required)
There are numerous traders and hedge funds that routinely make money selling premium, myself included.
Good luck!
MoMoney.
Is that horse still neighing? C'mon Mo beat it some more and let us all go back to watching the crappy new CNBC...
LMAO. No more beating from me 