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The idea is that a simultaneous bull and bear spread is the equivalent of a straddle except ...
- you don't make as much, you don't risk as much
- you don't have to be so quick
It's for the slow among us.
Have a great weekend everybody.
- Stuart
>>> "Tullman, Mitch" <MitchT@xxxxxxx> 06/05 4:58 PM >>>
then why be short a straddle at all if you are going to put on bull and
bear sprds?
I did iron butterflies a lot.....you just gotta be quick.........or
don't play
> -----Original Message-----
> From: Stuart Hazlewood [SMTP:shazlewood@xxxxxxxxxx]
> Sent: Friday, June 05, 1998 2:27 PM
> To: MitchT@xxxxxxx; realtraders@xxxxxxxxxxxxxx
> Subject: Re: RE: Gen: The problem with the subject of systems.
>
> 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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