Quote from riskarb:
I must be missing something. Does it involve selling 90, 95, 100 puts and 100, 105, 110 on the calls, one per strike and hedging into the trend with spot?
No, you aren't missing much, if anything (you don't miss much around here
) . For the most part, yes. The author uses SPX options and hedges with 2 ES. To me it would make more sense simply to sell the ES options (good liquidity, small spread), but, whatever works for him. I guess.
I have no problem with selling (or buying) options and hedging with the underlying (I learned it in Natenberg), but the strategy to me makes a lot more sense as a vol play (selling what appears to be high vol and buying back at what hopefully will be lower vol, or vice versa), and/or as a market timing play (sell options close to the strike that you predict the underlying will be headed). The "Asian straddle," at least acc to the article, is neither. Indeed, the author admits that he put the strategy on during a period of low volatility, and that he was predicting at the time higher vol. That to me makes no sense. To me, at least, it would make more sense, in that kind of environment, to buy slightly otm puts (30-35 delta) a few months out and hedge with buying the underlying. When volatility rises, sell the now higher vol but still otm puts and sell the underlying.
I also have no problem with being short (or long) options at varying strikes. But I would leg into them and hedge accordingly. The author, at least in the example he gives, puts them all on at once. That to me seems unnecessary, though I could see how it might be an easier way to become delta neutral.
The Asian straddle: a straddle and two combinations, and an exotic name with a giggle effect.
