GZ
Have been reading the discussion about your strategy with great interest. Take a look at this post, which I am assuming is the beginning position for your strategy.
Message 5008750
If I understand your strategy correctly it is to add either a long or short underlying position in the equity or future as it crosses at or near (with directional movement) the strike price.
Thus, being long the underlying as it moves against the shorted call protects against a loss on upside movement and being short against the shorted put protects against a loss on downside movement. To not get whipsawed around the strike price requires some confidence in the directional movement, being very nimble on trading the underlying, and willingness to accept some loss in the underlying to protect the premium.
Unless the targeted strike price happens to be near the reversal point (either direction) frequently, which is unlikely, the risk from it appears to be both reasonable and manageable.
Would it be accurate to say that the strategy is one of taking a gain in advance and then managing it to preserve as much of it as possible?
Would it also be accurate to say that the further from the targeted strike price that the underlying has moved, the less management that is required to only preserve the advance profit?
By example, could this same strategy be used with an existing underlying price of say $53 to sell the 50 put and sell the 55 call? It looks like this would lower the initial profit, but would provide for some flexibility in the reversal of the underlying position which could eliminate some of the whipsaw risk and provide some protection against getting the options exercised before expiration and leaving one of the sides exposed.
Now that I think about it, the biggest difference between your strategy in futures and using it in equities may be the potential for getting the ITM side exercised before expiration, which would force you to either close the other side, which will reduce the profit, leave it open and live with the risk, or reestablish another position on the side that is exercised.
Another significant differences in doing this in equities appears to be having to constantly search for stocks that both have enough liquidity to support the stock and options trades at the right times and have enough premium in the options to make it worth it.
Finally, stocks unlike the futures, tend to have more significant gaps, which could cause significant erosion of the initial profit or a loss if it gapped up or down significantly through the strike price and against the underlying position.
Okay, now that I have thought out loud for a while, all comments about how far (and why) off base I am are encouraged.
Troy |
