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RT'ers:
Mitch Tulman wrote:
If you are riding short straddles...the easiest thing to do to protect
profits is turn them into "iron butterflies" by buying the wings when they are cheap enough
example: sell 50 straddle
buy 45 put
buy 55 call
I respond:
The words "when they are cheap enough" sent a shiver down my spine. If the market moves sharply in one direction or another, the wings on that side are going to appreciate rapidly in value. If you don't place all four positions on at the same time you could find yourself rapidly in hot water. Trying to adjust on a naked straddle that moves against you can be a horrifying experience.
Something else you might consider: Going short the straddle at the money and simultaneously going long an in the money call and an in the money put. If the market moves strongly in one direction or another, let's say upwards, your long put will depreciate more slowly than your short put. At some point you might consider taking both puts off the table and realizing a profit on the calls.
So for example: assume that the S&P June contract opened on Monday at 1100. With this position you would go
short 1 x 1100 put
short 1 x 1100 call
long 1 x 1115 put
long 1 x 1085 call
The depth in the money is up to you. The deeper you go the better from a delta perspective. i.e., if the market moves up, your long in the money calls will appreciate at a ratio to the futures approaching 1 : 1, while the short call will appreciate at a ratio of 1 : 2 (at least initially).
At the same time your short put will depreciate at first at a rate of 1:2 increasing to 1 : 1 as its delta approaches -1. Meanwhile your long put will depreciate more slowly, approaching a ratio of 1 : 2 only as 1115 becomes the at the money price.
Just a thought.
- Stuart
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