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MR GREG J FIN wrote:
>
> Anybody sell strangles, and short or long the futures when
> it becomes "in" the money? I was interested in this and was curious
> as to any real experiences. I understand you could take a major hit
> if there was a major gap opening one way or the other, or locked
> limit for days.
It is dangerous. I noticed yesterday, someone commenting about
Niederhoffer said that if he is naked short options, he always has a
stop in in the futures. This typically only works in theory, since it
often opens an entirely new can of worms for the trader.
Sure, when the strike is blown completely through, this can be a savior
if you are filled, but more likely other things happen.
My experience is that a strangle writer chooses to write strikes that he
considers outside the range of probable movement for the certain time
period. Let's say he sells a 114-120 strangle (I have that on now) in
the bonds and then puts a 1 lot buy stop at 120 and a 1 lot sell stop at
114.
Then the market for some reason goes through 120 and he is filled. What
are you left with?? Since the delta of the 120 call is still only
50ish, you are now overhedged by half a future. You are long half a
future, not only that, you are long at what you earlier thought was the
extreme of the possible range. If you are right and the market is
overbought the risk of a snapback is significant. The toughest decision
is where is your sell stop then for that future? Just below 120??
Since markets like bonds have a tendency to trade around strikes toward
expiration, you run the risk of getting in at 120-05 and out at 119-27
multiple times. That kills time decay you are receiving. AH ,the joys
of negative gamma!!!
I guess the point is that using futures stops to protect your options is
a time tested way to stress you out in a big way.
Good luck,
Eric
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