Virtual Risk Free Spread
- Thread starter jones247
- Start date
You may be right faith, as that is the sentiment of MTE & Neophytenate... I think...
The downside of strangles or straddles is the cost of such trades; whereas, the downside of this system is the potential for expiration on a specific strike price.... It's a matter of probabilities and initial outlay when comparing the two IMHO...
Walt
I know you separated it out so it looks like a fly and two ratios, but let's massage it a little.
Your ratios include a box, so they're equivalent to:
Iron out that flutterby.
Add them back together.
That's your position in three legs. Probably easier to visualize it now, too. It's a 32-35 vert and a 30-35 strangle. You can further synthesize it to a 30-32 vert and a 35 straddle, if it makes you feel better.
I'm sorry commiebat, but I simply don't perceive the equivalency. I must be slow I guess... It seems to me that combining a bear call spread with a strangle would in effect nullify each other. If the underlying asset goes down, then this strategy profits; however, if the underlying asset goes up, it seems that this strategy would lose money.
Walt
Walt
Commie is correct. I got there by eliminating a conversion and reversal from the spread. One reversal left + the 30C=the 30P.
Oops conversion + reversal = box. Listen to commiebat
Thanks OP - good thread.
Thanks OP - good thread.
Reading the text of the person who started this thread, it seems to me that what he has in mind can rather be implemented by:
1. Selling a straddle.
2. Buying more strangles than staddles (for instance 2 strangles for each straddle).
The profile at expiration should look like letter W. I suggested this to a fellow few days ago, who wanted to hedge his theta.
I do not recall the link, but it is somewhat there.
I would have built this in another way. Way before earning, I would have bought some of all of the strangles. Then on the day before earning, I would sell the straddle when vol should be high.
Now on the day before earning, vol should be at its highest,
and the position can be alternatively viewed as
1. Selling volalitily ATM, and buying vol OTM (one of the two strangles). This is typically the opposite of what people do to play earnings. But they lose when stock does not move.
2. The remainging net strangle position is essentially a hedge against the move (which is negative for position in point 1).
I would not use this for earnings. I would rather use it for a stock
when I know it might move (FDA, etc), but while waiting, I will pay for my strangles with the decay in my straddle (hedging theta as I suggested to a fellow who asked about this in the other post).
Good luck though if you have build this position. I rather see you make money than my analysis being right!
1. Selling a straddle.
2. Buying more strangles than staddles (for instance 2 strangles for each straddle).
The profile at expiration should look like letter W. I suggested this to a fellow few days ago, who wanted to hedge his theta.
I do not recall the link, but it is somewhat there.
I would have built this in another way. Way before earning, I would have bought some of all of the strangles. Then on the day before earning, I would sell the straddle when vol should be high.
Now on the day before earning, vol should be at its highest,
and the position can be alternatively viewed as
1. Selling volalitily ATM, and buying vol OTM (one of the two strangles). This is typically the opposite of what people do to play earnings. But they lose when stock does not move.
2. The remainging net strangle position is essentially a hedge against the move (which is negative for position in point 1).
I would not use this for earnings. I would rather use it for a stock
when I know it might move (FDA, etc), but while waiting, I will pay for my strangles with the decay in my straddle (hedging theta as I suggested to a fellow who asked about this in the other post).
Good luck though if you have build this position. I rather see you make money than my analysis being right!
The "box" I took out was simply a 32.5-35 bull vertical spread (short 35P, long 32P) and a 32.5-35 bear vertical spread (short 32.5C, long 35C). It should be pretty intuitive that those two positions cancel out, because they are the exact same play in opposite directions. It's more straightforward if you realize that a call vert and a put vert are equivalent. So, instead of those four options (one contract of each), you can equivalently hold no position.
The butterfly became an iron butterfly, which is another call vert/put vert equivalence.
After that, I took the "ratio" (leftover) part of each ratio spread and simply added it to the iron fly and wrote down the total position.
Equivalence is like anything else involving math. It doesn't matter what steps you take to get to the end, as long as each step is correct. If you think in terms of conversions and reversals, you can use those. I tend to think in terms of vertical spreads.