The Perfect Option position
- Thread starter Maverick74
- Start date
again off the top of my head (i havent analysed this) i think you can manipulate this base position to fit any need, however as a pro interested in making consistent profits, the big home run implied with the long call and put will seldom happen. therefore, it is prudent to modify the strategy by replacing the long call and put with spreads(credit ), thereby reducing the outright cost of your position.
cheers
cheers
Quote from tikipoki:
make a crazy butterfly
s 3 nearmonth 100
l 1 nearmonth 95
l 1 nearmonth 105
and combine it with:
l 2 longmonth calls 100
l 2 longmonth puts 100
?
Tiki
Close but remember you are exposing yourself to vega in the back month immediately.
oops, the above should say credit or debit spreads.
You are not there yet. Close but not there. This play is very consverative and really hopes for NO movement. If the stock breaks out then the risk profile of the position changes and can produce unlimited profits.
mav, i really cant see adding anything else to this spread (for a debit of course) because if you pay for anything else, the potential profit on the fly probably goes to zero(or neg.). maybe adding some credit spreads on either side...
regardless, unless you are on the floor, you can forget about his startegy.
regardless, unless you are on the floor, you can forget about his startegy.
No, you don't need to be on the floor. This spread has some very attractive characteristics but you are leaving out a few things. I don't like to nitpick but as you know I'm sure, very subtle changes to any option spread can produce very different risk profiles.
Ok, let's use a $100 stock and we'll use the nov/april spread. Essentially what you are trying to do is put on a spread that has zero time decay or positive time decay. Which means you can either be paid to hold it or at least not be penalized for holding it. However we also want some upside on this spread, we want to create a position that can explode to either side. This explosion could come from price movement or from implied volatility going up. However, if the stock sits still we still want to be able to make a small profit and in my example if the stock sits around 100 we will make a decent profit. Between 98 and 102 we will have some profit. So you could put 100 of these trades on and earn money on all of them and if a few of them make dramatic moves either in vol or in price you have an unlimited profit potential. Now think about this again. How would you do this. You almost have the semantics down, just fill in the blanks now. You are about 95% of the way there. Unfortunately, without that last 5%, this spread looks like crap. LOL.
Good luck.
BTW, if you take bits and pieces from each post on this thread, you will have the strategy. I just want to see someone put it all togethor.
Also, it has occured to me that some of you have an unfair advantage. If you have option analysis software it will be very easy for you to graph this position and tweak it until you get what I want. I am hoping that you guys can visualize this more and have more of an intuitive understanding of this spread.
Also, it has occured to me that some of you have an unfair advantage. If you have option analysis software it will be very easy for you to graph this position and tweak it until you get what I want. I am hoping that you guys can visualize this more and have more of an intuitive understanding of this spread.
Something else to add here. The biggest risk in this trade is skew risk. If the skew profile changes it will hurt the profitability of the trade. However, it will not be fatal. It will just cut into the profits. Carry on.
Is a Cartwheel warmer, colder, or about the same?