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Since I am very new to options, I thought would be great to ask the opinions of the experts in this group. Please note that I will hold strangles till expiration.

The goal is to sell strangles (OTM calls and OTM puts) and consequently set a STOP-Market order for Long/Short futures if the current stock price touches any of the strike prices. I do not want to wait till the price reaches breakeven to avoid gap-ups or gap-downs.

If price touches the Call strike price, we go long futures.:

1. If it rebounds on the opposite side after touching the call side, we will close position quickly to limit losses. There will be losses due to whipsaws but the premium will probably make up for it.

2. If it breaches the breakeven point, we will still be in profit at expiration. We will get to keep the difference between the strike price and breakeven price and also the premium.

We will do the same on the Put side. Please see below figure- enter image description here

My questions are-

1. If I can dynamically manage to do this, there seems to be less tail-risk but I am not sure if I am missing something? Please suggest.

2. If I hold the positions till expiration, with this strategy I am immune to delta, IV, gamma etc. Is that correct?

3. In what way are other trade management (rolling positions etc) superior than this strategy?

4. What other risks do I have in this strategy?

Your suggestions and comments are highly appreciated. And kindly excuse me if the question appears stupid. Thanks in advance.

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I'm not a pro and my experience is with equity options not futures so take this with a grain of salt.

You have the right idea to defend when the underlying's price touches a strike price. However, I would adjust before that, even long before that if these are wide strangles.

With equities, you can delta neutral hedge with the appropriate number of shares whenever you want. In this era of no commissions, frequent adjustments is no longer a costly problem.

I would be more inclined to roll the short call up and possibly out in order to give yourself more upside tolerance for adverse price move in the underlying. Trade time for potential intrinsic value loss. IOW, roll up a strike or more and out a week or two (if weeklies available), hopefully for a credit. But this isn't without risk (see TSLA below).

At the same time, consider the possibility of rolling the now deeper OTM short put up as well, bringing in an additional credit. If the short put was initially 10 pts OTM and it's now 15 pts OTM, roll it up 5 points if the credit is worthwhile.

Much of this depends when the price move occurs. If it's closer to expiration, theta will have worked much of its magic and rolling will be for a larger credit. If the adverse move occurs soon after taking the position, not so much.

In general, I would not hold positions until until expiration, trying to capture the last nickel or dime of time premium. Compare the premium per day for the existing position with the premium per day for a possible subsequent position. If the latter is larger, roll the put, call or both out and if necessary, alter the strikes.

A few months ago I chatted with a fellow who was selling two week naked puts on TSLA when it was over 850 dollars. He believed that he could roll forever and hold on until there was a recovery. I told him that he could run out of expirations to roll to if price collapsed, citing Valeant Pharma (now Bausch) as an example. I suggested that he add some negative delta. He didn't. As TSLA dropped and dropped, he kept booking his losses and rolling down and out a week or two at a time for a credit and then a month or two at a time. By the time TSLA was under $400, he was short the LEAPs. Luckily for him, TSLA had a massive rally because if it had continued to drop, he had no more expirations to run to. The point? You can plan and you can adjust but that doesn't mean that the market will cooperate.

My two cents is that as a beginner, if you want to chase short premium, sell vertical spreads or iron condors (possibly wide) so that you have some inherent risk management built in. Yes, the premium will be somewhat lower but you won't blow yourself up (the gap!). And if short strikes are challenged, you'll be able to learn your adjustments which will become eventually become second nature so that you daren't the deer in the headlights when it hits the fan.

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  • $\begingroup$ Thanks a lot @Bob. Your answer was beyond amazing. Thanks again. It was really helpful. $\endgroup$ – rockav Aug 23 at 19:00
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    $\begingroup$ In that case please upvote and possibly accept the answer. $\endgroup$ – noob2 Aug 23 at 22:02
  • $\begingroup$ I can't upvote. New to this forum. They will store my upvote but not publish it. Ahh accepting the answer I can do. Sorry didn't know that part. $\endgroup$ – rockav Aug 24 at 6:06

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