I don't think that back month vertical will help you since you are closing it out that day. Even if you get close to the mid price you are still paying for bid ask on two options. Plus that vertical will have a lot less gamma than your straddle since it is in the back month. What I have found is that the easiest thing to do is start pulling your calls/puts off to get back to delta neutral taking in profits as you go (or just take the whole thing off once you get to your expected move). I traded this on AAPL last year. I found once it hit a strike it would actually decouple instead of pinning like a lot of people thought it would. I think a big part of it is that everyone is so enamored with selling weeklies you get a slight edge buying (sometimes).
Trading Long Straddles
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I don't think that back month vertical will help you since you are closing it out that day. Even if you get close to the mid price you are still paying for bid ask on two options. Plus that vertical will have a lot less gamma than your straddle since it is in the back month. What I have found is that the easiest thing to do is start pulling your calls/puts off to get back to delta neutral taking in profits as you go (or just take the whole thing off once you get to your expected move). I traded this on AAPL last year. I found once it hit a strike it would actually decouple instead of pinning like a lot of people thought it would. I think a big part of it is that everyone is so enamored with selling weeklies you get a slight edge buying (sometimes).
I think ur right on that one, once a move happens I guess you can start selling front month verticals and turn it into a wider and wider long strangle so ur booking pnl and owning a strangle which expires in 2-4 hours that are 2 sigmas out. Ex. XYZ at 50, own $50 straddle, XYZ goes to 53, sell 50c(book pnl) buy 55c. You now own 55c/50p strangle.
I still have to test whether there is something about selling the back month verticals precisely for the reason that u mentioned-lower gamma. I wonder if you can put on these ATM straddles on the front month and take them on.off for the next 5 days -paying a little theta each day (avoiding the overnight decay) and use the front month ATM straddles as a way to sell back month verticals really expensive. Kinda like gamma scalping.Prob too much commission to be worth it.
I still have to test whether there is something about selling the back month verticals precisely for the reason that u mentioned-lower gamma. I wonder if you can put on these ATM straddles on the front month and take them on.off for the next 5 days -paying a little theta each day (avoiding the overnight decay) and use the front month ATM straddles as a way to sell back month verticals really expensive. Kinda like gamma scalping.Prob too much commission to be worth it.
If you're system has you with firm conviction in a particular direction, there is no reason whatsoever to do a straddle. If volatility is low-- buy calls. When IV is high-- sell puts. Based on a 2-3 day timeframe and want some wiggle room-- look to a new weekly series (every Thurs)... If u feel strongly thr move is imminent at present-- do the front weekly. I
Prefer deep ITM-- but if your willing to take the risk and u get your move-- the returns can be phenomenal on ATM/OTM.
I have seen a lot of traders that are very successful just trading verticals. If you have a bias of where it is going then buy an option 1 strike in the money and sell an option 1 strike out of the money. If the conviction is strong, buy an otm vertical (provided the short option makes a difference). If you have a bias of where you think it won't go, sell an otm credit spread. Verticals have a way of reducing the risk of other greeks so you can focus on the delta which is what you want in a pure directional play.
The only thing I know about futures is that they are open ended, no end to the losses. Whereas options are limited to your debit.
Can u elaborate on. Provided short option makes a difference. Thnak you
I have no idea the problem with elite trader? But I try to comment on another forum I follow and every time I post it kicks me back to LOGIN again. Anybody have a clue? Is it because my thingy is only working on this forum, but thus will not allow me to work on another one?
Riffraff,
I think timestops are very critical in this trading scenario. If you think stock is at a critical point and it does not happen in x minutes or hours. Would u agree that u gotta get out instead of waiting for end of day?
I think timestops are very critical in this trading scenario. If you think stock is at a critical point and it does not happen in x minutes or hours. Would u agree that u gotta get out instead of waiting for end of day?
Just saying to be careful if you are buying an OTM debit spread and the short is only worth .10-.25 for example. You are capping your gains instead of just owning the outright long option.
On a separate note, I see so many traders keep a credit spread on way too long trying to wait for that last 10-20 cents decay. A short option that is 1.00 will drop to .50 a lot faster than a .10 short option will drop to .05
Mush-- timestops are huuuuuge... u MUST have a designated time rule that NEVER gets breached...the acceleration at end of day will destroy an account... especially if you are trading a strangle and are still OTM on both sides. With a straddle there is some more flexibility on the length of the time stop due to the fact that the majority of time you are ITM on one side.