Vertical Spreads for Aggressive Growth

Quote from Cache Landing:

Quick suggestions.

Forget about the current position and formulate a forecast as if it weren't there. You can't do anything until you know what you're predicting. If you were to tell us what you think will happen then we could indicate some adjustments. For example;

If (like me) you think we still have a higher prob of a drop than a rise (or simply stagnancy), you might consider rolling the spread out but not up. This way you don't increase the risk parameters of your initial position. You've "bought" more time with a currency called "decreased p.o.p."

If you think the rally will continue, roll into a call debit spread and ride the wave. Or if you don't mind the risk, buy the shorts back and look for a better exit on the longs later.

You're naked straddle was a theta/vega play. You can stop the bleeding (eg. buying the OTM strangle) but other than that you have no choice but to ride it out or cut losses. Again it will depend on your forecast.

BTW, when analyzing your naked straddle, consider the idea that what we are in right now are the PERFECT conditions for taking profits on a naked straddle, ie. extremely low vols and very little time till expiry. IOW, what was originally a theta/vega play has now become a directional play. Theta won't help you any more, and vega is much more likely to work against you than for you at this point. Do you want to be in a directional play right now? Just a thought.
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Straddle is non-directional. As it is a lower prob play than far otm spreads, the b.e. point will be approached more often. The question is whether to adjust, and if so when and how. I'm adverse to directional adjustment for 2 reasons: one, it ain't that easy to do and two, if you are that good at directional why not just play it with long futures, calls and puts?

So where does this leave you? Plan adjustments when underlying moves to some percentage of value of straddle. Or trend follow with futures, effective neutralizing delta/gamma. Very different set of choices and mindset than nickle strat.
 
Quote from LeonPhelps:

Straddle is non-directional. As it is a lower prob play than far otm spreads, the b.e. point will be approached more often. The question is whether to adjust, and if so when and how. I'm adverse to directional adjustment for 2 reasons: one, it ain't that easy to do and two, if you are that good at directional why not just play it with long futures, calls and puts?

So where does this leave you? Plan adjustments when underlying moves to some percentage of value of straddle. Or trend follow with futures, effective neutralizing delta/gamma. Very different set of choices and mindset than nickle strat.
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Yes the straddle is non-directional. I was under the understanding that you had opened a naked straddle a few weeks ago and your calls were ATM. If that was the case, my point was that what you would then have is a directional play. If a trader sells a naked straddle and the underlying moves big, the deltas get out of whack.

So what was originally supposed to be delta neutral, would then be -delta. With only a week to expiry, most of the theta gain has already happened, and with the big rally the vols have dropped as much as can be expected. That's why I made the comment about a directional play.

Anyway, what I would do to the naked straddle depends on how long it took the underlying to reach my shorts. If I opened with 4 weeks left and it took 3 weeks to get to the shorts then I would convert to the iron fly. Losses would be minor if the short is ITM at expiry, and I've got a nice max profit if it moves back to the longs.

I like directional plays, so on a quick move I would convert to either a bull call, or bear put when I felt the timing was right. Given the amount of margin that would be tied up by the naked straddle, the risk on the debit vertical would be minor.

I don't plan adjustments in terms of r/r percentages after the first day. I evaluate based on the info at hand, and make adjustments according to my forecasts.
 
Quote from LeonPhelps:

I'm adverse to directional adjustment for 2 reasons: one, it ain't that easy to do and two, if you are that good at directional why not just play it with long futures, calls and puts?
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I can't speak for everyone, but I can give you my opinion.

I agree that directional forecasts aren't easy, and I have my reasons for not simply trading futures, or long calls/puts.

1) In order to make enough money with futures I have to leverage too much. It is outside my risk parameters.

2) The timing is not always right for long puts/calls. If you read through the journal blotter you'll see that I have many long call/put trades. I'm not against long c/p trades, but I won't do them unless the conditions are right. I'm not going to pass up a good directional setup just because IV is too high or something. So I use spreads that will benefit from a vol drop. If key s/r is broken then I don't have a problem with reversing the direction.
 
Cache Landing,

Just found this thread. Thanks for sharing.

If you don't mind, what is IC, FOTM and sigma? I only read a few pages and I keep seeing them. Don't seem to be able to find them in the internet. Thanks
 
Quote from billp:

Cache Landing,

Just found this thread. Thanks for sharing.

If you don't mind, what is IC, FOTM and sigma? I only read a few pages and I keep seeing them. Don't seem to be able to find them in the internet. Thanks
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IC = Iron Condor
FOTM = Far Out of The Money
Sigma = standard deviation
 
Well, my NEM position is finally looking a little better. (knock wood) :D

If anyone was wondering, I haven't been too concerned about this one because I think it will ultimately find support at $40. I'm not against rolling this one.
 
Quote from LeonPhelps:

Straddle is non-directional. As it is a lower prob play than far otm spreads, the b.e. point will be approached more often. The question is whether to adjust, and if so when and how.
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Well, i wouldnt play a short straddle non-directionally(sold ATM) but thats just me. I'd rather lean my deltas into the direction of my signal ala riskarb. Gain on delta and skew with a trade to the OTM strike. Once you have positive expectancy in the trade you can adjust in a variety of ways but it would depend on your underlying prediction going forward. As far as hedging with a move against you, i rather offset at 1:1 or 2:1 risk/reward and then look for the next signal but thats a personal choice.
 
Quote from rallymode:

Well, i wouldnt play a short straddle non-directionally(sold ATM) but thats just me. I'd rather lean my deltas into the direction of my signal ala riskarb. Gain on delta and skew with a trade to the OTM strike. Once you have positive expectancy in the trade you can adjust in a variety of ways but it would depend on your underlying prediction going forward. As far as hedging with a move against you, i rather offset at 1:1 or 2:1 risk/reward and then look for the next signal but thats a personal choice.
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I agree, but LP indicated that he doesn't like directional plays.
 
Today's Action

BTO 1 SPX 1365 NOV straddle @ 34.00

Profit/Loss

Acct. Value: $16,465.00

YTD Gross P/L: $7,245.00

YTD Commiss: $780.00

YTD Net P/L: $6,465.00

YTD % P/L: 64.7%

I posted this because it ties in with my verticals that are currently ITM.
 
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