Variable Ratio Write Vs. Short Strangle

[hweeks]

It seems to me that a Short Strangle is a better way to achieve a similar P/L profile, unless perhaps you are already long the stock.

The funny thing is that I can find no mention of the Short Strangle in Options as a Strategic Investment.

Any thoughts?

 

[drcha]

He might call it something else, but I'm sure he does discuss them.

 

[hweeks]

drcha, you are correct. He does discuss them briefly, late in the book, when discussing trading volatility. He does not discuss it when he presents Variable Ratio Write, which is surprising as he usually does tell you when a strategy has a substitute which can be more efficient.

Are there significant differences between the two that I am missing?

 

[OTM-Options]

drcha, you are correct. He does discuss them briefly, late in the book, when discussing trading volatility. He does not discuss it when he presents Variable Ratio Write, which is surprising as he usually does tell you when a strategy has a substitute which can be more efficient.

Are there significant differences between the two that I am missing?

Put your thinking cap on and don't let the fancy names fool you.



Short Strangles
An equal amount of sold-to-open calls and puts - same expiry, different strike prices.

Variable Ratio Write

• Variable = Capable of being changed
• Ratio = The relation between two numbers.
• Write = Sell-to-open option position.

Can you figure out how they might differ?

 

[hweeks]

Thanks. I understood Variable to refer to the varying strike prices as opposed to a Ratio Write where all the Calls are the same strike price.

But I think I understand your point, that a VRW is more easily adjustable to maintain neutrality, is that correct?

 

[OTM-Options]

Thanks. I understood Variable to refer to the varying strike prices as opposed to a Ratio Write where all the Calls are the same strike price.

Variable could also be referring to the call/put ratio. Sell 3 puts for every short call, sell 4 puts buy 2 calls, and so on.

But I think I understand your point, that a VRW is more easily adjustable to maintain neutrality, is that correct?

Yes .... Or reduce the risk. Variable Ratio Write covers a huge amount of possible option positions, just like a Vertical. I don't like option position names because they mean nothing and can be interpreted in many ways - I prefer real quotes, expiry dates and strikes.

 

[hweeks]

Thanks.

So here's there real stuff. Prices from yesterday, 6/30/15. Pardon if my syntax isn't up to snuff.

GPRO 53
Aug 21 60 Call 1.60
Aug 21 45 Put 1.50
Aug 21 45 Call 9

I first considered a VRW:

Long 100 GPRO
Short 1 45 Call
Short 1 60 Call

This has a max profit of $260 and an initial margin requirement of about $4300

I then realized that a Short Strangle:

Short 1 45 Put
Short 1 60 Call

has a max profit of $310 and an initial margin requirement of less than $1000.

I sold to open the Short Strangle.

 

[yroyal]

Variable Ratio Write scores over Short Strangle in its Adjustability... Its easier to adjust the trade profitably, once the breakevens are breached

 

[water7]

Variable Ratio Write scores over Short Strangle in its Adjustability... Its easier to adjust the trade profitably, once the breakevens are breached

what do you mean by "easier to adjust"?
let's use @hweeks example and assume GPRO is super liquid

thanks before :]