Is a Cartwheel warmer, colder, or about the same? [/QUOTE]
Colder. But not too cold. It's a close cousin though. LOL.
The Perfect Option position
- Thread starter Maverick74
- Start date
Colder. But not too cold. It's a close cousin though. LOL.
Don't give up everyone. You can piece it together by reading through all the posts on this thread. The clues are here. All you have to do is put it together. Isn't this fun? LOL.
I was thinking that it has something to do with a backspread (for the explosion on a very sharp move) attached to something like a butterfly or iron condor. You are net long options (for the positive vega and gamma) with the backspread and can do well with a dull market or something that explodes.
Getting very close. You are one of the first to at least understand the backspread component of the back month options. And you are just about their on the front month. Now let's see if you can put the whole thing together. Stock is $100 per share with the Nov/April months. Which options do you buy and which do you sell. We are just about their folks come on. I hope everyone is learning a lot from this exercise. It sure beats all the my moving average is better then yours threads. And who made money today threads.
Quote from tikipoki:
Indeed great thread
how about this boy:
Pregnant butterfly in Nov:
+2 call/put @ 90
-4 call/put @ 100
+2 call/put @110
Ratio'd spread in Apr:
+2 put @ 95
-1 put @ 100
-1 call @ 100
+2 call @ 105
eh
Tiki
Tiki, I am going to declare you the winner! Although I didn't even think of using the butterfly strikes so wide although you could do that on the front month.
Basically what I had was a butterfly on the front month which would be done for a credit.
+1 put @ 95
-1 call @ 100
-1 put @ 100
+1 call @ 105
This gives you your typical butterfly that will carry positive theta at the 100 strike and around it while also limiting your losses to the outer strikes. So with the butterfly would want the stock to sit still and not move which in and of itself is a good strategy for many.
So then we add a WRANGLE!!!!! That's right someone mentioned this earlier on the back month which is also a form of a backspread. However, we sell the 100 strikes yet again to keep our credit. So....
+2 put @ 95
-1 put @ 100
-1 call @ 100
+2 calls @ 105
Long Wrangle!
What this does is it's basically a backspread that will give us long vega and long gamma exposure should the stock take off or collapse.
So when you put the spread together, you start off delta neutral, theta positive, and no vega exposure. You will be earning time premium and hope that the stock just sits there. However if the stock starts to move, you will still be making money during the front month no matter what. If the stock really moves hard then the position will turn into a long gamma, long vega position in which your theta will go negative. However you can also let your deltas run or you can gamma scalp them. After the front month butterfly expires, you will be losing money if the stock sits still and stops moving so you can then put on another butterfly. At expiration on the back month you will have a range where you will lose money after only a moderate move in the stock. But if the stock either sits still or breaks one way or the other you have unlimited profits. We have the best of both worlds here, a credit spread that earns premium as long as the stock sits still and doesn't move and if it does move we then have a long gamma long vega position that could make us unlimited profits. Hence a very very versatile strategy. If you put enough of these on, you could really spread your risk out. Of course you can always alter the strikes to change your profit range. By widening the strikes on the front month butterfly like Tiki did you reduce your profits slightly but increase your odds of making money during the front month.
Thank you for everyone who participated. I hope everyone here learned something. I think this is ET at it's best. Hopefully we can continue this option dialogue on many other option threads.
Again, congratulations to Tiki! Give yourself a cookie. LOL.
But this spread assumes that you can put the fly in the front month for credit. Which is a huge assumption correct? Unless you are selling straddles and a week later buying the wings to get a good straddle price. Even when I was on the floor getting free flies is not a lay up! Am i missing something? The only other way to get this kind of position is to do ratio calendars betweens months with huge smile profiles.
No, very easy to put on for a credit if you center the ATM strikes. If stock is at 100 and you sell the 100 call and the 100 put, and buy the 105 call and the 95 put you should be able to get 3 pts in credit. You are thinking of putting on call or put butterflies. Very different. In your case you are saying if stock is 100 and I buy the 100 call, sell 2 105 calls and buy one 110 call then yes, this will always be a debit. In fact if you could do a call or put butterfly for a credit you should do them 1000 times, it's a risk free trade for you! However when you sell the ATM strikes you always always always get a credit. They are the most juiced options.
So the front month you should be able to do for a 3 pt credit and if you leg into it maybe even more and the back month you could do for maybe a 1 to 2 pt debit. So the overall trade will cost you anywhere from maybe a pt if you don't leg into it, to even or even a slight credit. This is a great trade! Great risk to reward ratios!
Remember the basics. The only thing you want to watch out for is skew. You would ideally want to find positions where the skew is as flat as possible. The skew will rarely work in your favor due to the fact that OTM options are almost always priced more then ATM options but at least try to find options with very flat skew.
Anybody else have any questions about this position? It is such a great strategy that I don't want anyone not to understand it. Feel free to start another thread on your favorite option strategy. This open discussion is good for everyone.