YG and ZG options OTM

[Soon2Bgreat]

YG, the Gold mini futures contract has a value of 1/3 the full size. (3.33 a tick vs. 10 a tick)

Am I correct in the assumption that YG has an equivalent delta of .33 to ZG?

If I went long a YG contract and long a ZG put that was OTM enough so that it's delta was .33...i would start to accumulate favorable delta's in any direction of the market, correct? Granted there's more potential on the downside as you are limited to .33 delta with an increase in price.

The way you lose on this is if the movement isn't enough to overcome the cost of the put or the decrease in IV for the put. Am i correct in this assumption?

This seems like a lower cost long straddle for a couple reasons. You don't have to buy the long call and aren't falling victim to as much time decay. You have to put up less initial cash as the OTM put is cheaper than 2 ATM options (C,P) You also lose the potential for as much profit.

Am i generally looking at this position correctly or is there something I'm missing?

This seems like a pretty good, cost effective play depending on your views, no?

Any input at all is appreciated...Thanks.

 

[donnap]

Quote from Soon2Bgreat:

YG, the Gold mini futures contract has a value of 1/3 the full size. (3.33 a tick vs. 10 a tick)

Am I correct in the assumption that YG has an equivalent delta of .33 to ZG?

If I went long a YG contract and long a ZG put that was OTM enough so that it's delta was .33...i would start to accumulate favorable delta's in any direction of the market, correct? Granted there's more potential on the downside as you are limited to .33 delta with an increase in price.

The way you lose on this is if the movement isn't enough to , oovercome the cost of the put or the decrease in IV for the put. Am i correct in this assumption?

This seems like a lower cost long straddle for a couple reasons. You don't have to buy the long call and aren't falling victim to as much time decay. You have to put up less initial cash as the OTM put is cheaper than 2 ATM options (C,P) You also lose the potential for as much profit.

Am i generally looking at this position correctly or is there something I'm missing?

This seems like a pretty good, cost effective play depending on your views, no?

Any input at all is appreciated...Thanks.

You may look at it as equivalent to long 3 YG puts, long 1 YG future or long 1 ZG put , long 1/3 ZG future.

Either way it is a synthetic straddle. Yes, youi lose leverage (gamma) by using the synthetic over a straddle. You "pay" for the time decay savings with a greater loss area.

Generally, you are looking at the trade correctly. Personally, I prefer the synthetic straddle, since time decay i(theta) is reduced from the straddle. When using this strategy with stocks or multiple contracts - it is usually easier to trade the underlying when scalping gamma.

As far as being cost effective - you get what you pay for.

 

[riskfreetrading]

Some remarks:

1. Your put is OTM. So the position cannot be a straddle. Did you mean a strangle?
2. It would be like a strangle at the time you build it up. But the call in a strangle gains delta's. The deltas in the mini gold position will not gain deltas.
3. In exchange for the loss of gamma in the call replacement (gamma is the cause for delta changes), you are rewarded by not paying time decay.

It can be a good strategy. You can add more to the long underlying position if prices go up to replace the call behavior in terms of deltas.

Personnally, I would do what you suggest rather than a strangle. I would infact also consider the opposite, if vol is lower on the call side. This means buy a call and short the mini gold with an equivalent number of deltas.

 

[donnap]

Quote from riskfreetrading:

Some remarks:

1. Your put is OTM. So the position cannot be a straddle. Did you mean a strangle?
2. It would be like a strangle at the time you build it up. But the call in a strangle gains delta's. The deltas in the mini gold position will not gain deltas.
3. In exchange for the loss of gamma in the call replacement (gamma is the cause for delta changes), you are rewarded by not paying time decay.

It can be a good strategy. You can add more to the long underlying position if prices go up to replace the call behavior in terms of deltas.

Personnally, I would do what you suggest rather than a strangle. I would infact also consider the opposite, if vol is lower on the call side. This means buy a call and short the mini gold with an equivalent number of deltas.

I'd say that it's more akin to a straddle because the max loss at expiry is a single point (the strike of the put); whereas the strangle's max loss is over a range. It is really equivalent to a 1 ITM call, 2 OTM put combo at the the strike so how about "synthetic combo."

The various long gamma strategies mentioned are all used with a similar goal in mind. They all have their pros and cons - so I think that it is a matter of individual taste and, perhaps, market factors such as option liquidity or IV level.