Hi Ox;
I continue to play with straddles. I'm learning a lot, particularly about myself ! Hah. (I hope what follows provokes a response from you.)
Hedging:
I have just realized that a naked straddle should be hedged against trend. There is no danger, so no hedge is necessary, while the underlying is in a trading range. The technical indicator that tells you when you are in a trend is Wilders ADX. It indicates a trend (either up-trend or down-trend) by rising. To indicate that the trend may be weakening and a trading range resuming, it rolls over.
Take the following QQQ chart.
stockcharts.com[w,a]ddclynmy[dc][pb45!b200!d45,2!d45,1!i][iUl14!Lb6!La12,26,9!Lf!Ll8]
(change it an 8-bar ADX instead of 14 to make it more sensitive)
Following this strategy one would let the straddle run to expiry. About August 15, the ADX warns of a trend, and one might then have hedged the straddle by shorting. About September 26 the ADX rolled over, and the hedge might then have been removed.
Straddle alternative;
The other danger of a straddle is commissions, mainly because the straddle has two sides, puts and calls, and hedging with underlying adds a third dimension. This danger can be avoided by allowing the straddle to run its course, and then to continue it by writing ONLY puts OR calls on a "ratio-write" basis, which gives you exactly the same profit profile as a straddle. e.g. at expiry the calls are exercised leaving you short the stock... Stay short and write twice as may puts; they will either be exercised leaving you long the stock to write calls against, or they will expire worthless allowing you to write more against the continuing short underlying!
I know nothing about the American indexes like QQQ. Could the above strategies be followed using the QQQ as the underlying ? |
