That theta decay is a killer when using weekly options, LOL I using the virtual trading system at my broker, glad I did to work out any issues. Theta is a killer when long gamma.
Using Straddle/Strangle for Active Trading Hedge
- Thread starter GreatRedOne
- Start date
One interesting method I came across is termed the "slingshot" hedge developed by a guy named Cottell.
His book is available online somewhere and there's some YouTube videos, but the short/sweet version is to hedge using a long OTM put which is financed by short OTM call verticals. His version has you do 1 put and 2 verticals for each 100 shares (or DITM long) and I think they were all the same month, but nothing says you can't sell shorter term verticals and try to wring out a little more credit to offset the put cost.
Not a perfect method, obviously, but I like them as a hedge against the big moves.
I take a different view of the idea of using strangles for a hedge: most people think of them as an insurance expense that eats into their profit - they're prudently trading some profit for safety; so they go as far OTM as their tolerance for risk will allow. This "expense" perspective becomes a self fulfilling concept if far OTM options are overpriced; and this insurance expense comes with a painful deductible. A NTM straddle is likely to be fairly priced; it should have a break even expectation, so the expense for their use over many trades should be no more than trading expenses - it's nearly free insurance with no deductible. If you trade a strategy on which you make an average of x amount per month, but have win/loss streaks which threaten to blow up your account and your mental sanity, using NTM options will let you keep the same profit factor - it's not a compromise; it merely smoothes out the wild swings.