So I have recently been playing this strangle strategy where I open a call, and if the market doesn't do exactly what my trade plan says it should I open a put for the same expiration date. I only do this if I have reason to expect a 2 or 3 point move one way or the other. Normally I believe the market will become volatile I just figured I got in at the wrong time. And instead of closing the call that hasn't hit my stop loss yet. I open the put in order to possibly mitigate those losses or pay me with small gains. My question is, is this a sound strategy or should I be closing the position to try and get in at the appropriately timed move?
Hello, @Zachary Kaspar , welcome to the forums. Your options question is an excellent one. Too bad my vague response below isn't nearly as good. It's a little tempting to suggest that *no* single options strategy is sound, but rather some options strategies work well some of the time for a given situation. If you've lately had success legging into a strangle and you've been breaking even or possibly even showing some profit for your long call repair move, you (a) could be lucky, or (b) could have found a set-up that is working for a given market at a given time. In the case of (b), most options players milk a successful options set-up for as long as they can until it begins to fail. The good thing about the strangle, of course, is you always know what your maximum loss is...no more than what you've already paid for the contracts. So at least you somewhat control the cost of failure when market conditions change and you can no longer count on wild swings in prices and volatility to bail you out for establishing your long call (as you wrote) at the wrong time. Let us know how your thinking evolves as market conditions change in the future...there's a lot we can learn from each other with these versatile derivative financial instruments. And good luck always!
Thanks three eyes. Today it did well but my execution was bad. Made $30 at open and then I became indecisive. So I partially closed out and ended up giving everything I made back. And as far as how well the strategy works it is based on the system that I developed for catching those volatile moves. Most of the time I can pinpoint the appropriate direction and time of the move within a couple of minutes of the actual move (all is dependent on the 4 indicators I use for this system.) Dmi, macd, momentum, and mesasine wave. I have found when all 4 line up appropriately with the lines of support or resistance there tends to be a violent move worth a couple of points on the spy. The hardest part to the system I use is the human aspect and controlling my own emotional state. But I guess that is the hardest part of any traders system.
I would say this is probably not a good strategy. You’re going to be paying premium, and if you’re buying out of the money options, buying premium overall is a losing endeavor. Plus, because you’re buying the second option after you get a negative move against you, you’re paying more for the strangle, and if you would just bought the whole strangle when you made the first trade. However, with that said, the only way to know for sure is to try it, track it, and evaluate the results.
Chris Thanks for the response. I have only just recently started doing this particular strangle strategy. I do not have much data on the subject yet, however I have done this three times with positive results either breaking even or gaining a small profit. I do plan to continue tracking future results as well. I will happily share any data I get using this strategy. I do say that this strategy may not work for every traders system or with every traders brokerage company. I do not even know if it will continue to be successful with my own future trades. As far as premiums for the options go I dont know exactly. I normally choose option contracts that cost less than $100 per contract. And mostly choose contracts that are out of the money. For me it is not a matter of gaining the best price for the contract it is a matter of choosing an appropriate price range where I expect a significant move will bring the contract to the break even price. Which if my theory is correct should result in either the the two contracts cancelling out or a small profit. Keep in mind I am selling both contracts prior to their exp. Date.
Chris marking an update for you. Today I did really well ended up with 90% paper profits on a couple of spy put options. I also realized I had no day trades available to close out those contracts. So I decided to play on the theory that with such volatility as is currently present on spy. I took a position of calls in the hopes that this will secure at least part of the profits that I gained today. I will update tomorrow as to how well this practice worked for this current situation. I am expecting a loss of apx $150 from the total $1000 paper profit upon the closing of said contracts. Unless something unexpected happens and a continued drop overnight causes the call contracts to become a moot point.
