You are using an out of date browser. It may not display this or other websites correctly.
You should upgrade or use an alternative browser.
You should upgrade or use an alternative browser.
The Perfect Option position
- Thread starter Maverick74
- Start date
Quote from jones247:
DMO,
Aren't you really talking about an Iron Condor??? Short near/at the money and long on the wings out of the money...
Is there a better position strategy than the Iron Condor in light of your assertion?
Thanks,
Walt
Walt, I never think in terms of named strategies like condor, fly, xmas tree, etc. For me an options play begins with noticing an anomaly in the volatility pattern of an options contract. Assuming that anomaly will not last, how best to play it?
Let's say for example that normally the far back months of SPY always trade at the same IV, but at the moment the March 09 options are trading at an IV that is unusually higher than the June 09 options. So I'll want to buy June premium and sell March premium.
Next step is to determine what to buy and what to sell. Since there is so much time remaining, I have a very wide variety of strikes to choose from that are almost equal in terms of their gamma, theta, etc. So I'll want to choose the cheapest (relative to normal skew patterns) and the most liquid options to buy, and the most expensive and most liquid options to sell. I couldn't care less if they're puts or calls because I'll use the underlying to become delta neutral.
If possible though, I would prefer that my long strikes be further away from the money and my short strikes closer to the money, for the many reasons brought out in this thread. The more time remaining, the less important this is. With little time remaining it becomes crucial.
Hope this makes some sense.
Makes sense to me and to add to DMO's answer for jones247;
The difference between an iron and most of strategies mentioned in this dicussion is that the iron has just as many long options as shorts. The positions talked about, mostly in this thread, have extra long options on both ends.
The difference between an iron and most of strategies mentioned in this dicussion is that the iron has just as many long options as shorts. The positions talked about, mostly in this thread, have extra long options on both ends.
Quote from RiskDoctor:
Makes sense to me and to add to DMO's answer for jones247;
The difference between an iron and most of strategies mentioned in this dicussion is that the iron has just as many long options as shorts. The positions talked about, mostly in this thread, have extra long options on both ends.
You're right... I neglected to mention that...
Quote from dmo:
Just saw this thread for the first time.
Let me add this little-known fact: If you are long the wings and short the middle at a ratio that makes you premium neutral, then as IV rises you get longer and longer vega, and make money. As IV drops, you get shorter and shorter vega, and ALSO make money.
Don't believe me? Put it up on your simulator and you will see for yourself.
To the Riskdoctor - Hi Charlie! I traded in T-bond options with you from '84 to '87 (dmo was my badge). Loved your book - I can vouch for the accuracy of the anecdotes - you have quite an amazing memory to recall them in such detail!
That's very interesting. Is that single month or a calendar? Can you give an example please. Thanks.
For the fans of Charles' books - he was quite the amazing plunger in those days. When a broker had a thousand of something to buy or sell, Charles loved to be the guy who yelled "sold" - leaving everyone else in the pit with their mouths agape. At the time, 100 lots was more than most locals would take - even the ones working for institutions!
Quote from dmo:
I was talking about single month. I was just thinking about making a brief video to explain this, as a matter of fact.
The video is a great idea. Let us know where you post and we'll tune in.
I know it's been said before, but to all new traders: study this thread, note risk management necessary, then jump in and trade small. No serious risk and you'll make money frequently enough to keep you in the game.
Not possible to be long gamma, vega, and collect premium.