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Maybe these three pictures will help you clear it up. One, the straddle
is overvalued. Two, the straddle subjects you to twice the time decay.
Three, the straddle subjects you twice the volatility risk associated with
option valuation. The spread sheet will show the current valuations, the
second chart will show you profit picture as it is today, not at expiration
for the ratio back spread and the third will show you chart for the straddle.
It trading you want as few uncontrolable variables as possible. Ira
MikeSuesserott@xxxxxxxxxxx wrote:
Hello Gitanshu,thanks
for your interesting and instructive posts which I always look forward
to reading.
I have one question
regarding these synthetic long straddles that you often recommend (buy
OTM call, sell half as much stock or futures). I'm wondering where you
see an advantage as compared to the purchase of a straddle (buy call, buy
put). Let us compare, using last night's EOD prices. QQQ was at 77 3/8.Here
is Position-1 showing long 10 QQQ Dec 80 Calls, short 500 QQQ:
Now this would be
Position-2, long 5 Dec QQQ 75 Calls and Puts each (long straddle):
Max risk, time decay,
deltas and gammas etc. are approximately the same for both positions -
not completely the same, because there is no fixed strike price for the
underlying, but close.
However, capital commitment
for Position-1 is $ 23,463.00 (short sale margin + option premium), but
only $ 5,190.00 (premium) for Position-2.
Why should I go for
a position that requires four times the capital outlay?
Kind regards,
Michael Suesserott
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