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RE: Gen: The problem with the subject of systems.



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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