A question for some of the more experienced folks. When you are neutral on a Futures direction and you decide to play both sides do you have an opinion if it is better to do a Strangle (or IC) with a TP & SL in mind versus a Naked Put & Call (or 2 verticals) with each side having a TP/SL working as individual trades.
The reason I ask is I was neutral on oil (CL) a few weeks ago when it was about 60 and entered an IC (49/50 and 69/70) at around the 10 delta on each side for Oct expiry. Horrible timing..... The position is currently under water but haven't reached my 2x max credit point and far from my 50% max credit TP point. So I am staying in till I reach 2x Max credit loss . Margin has gone from 130 to 200 (as I am with IB still sadly due to being in Canada) but it didn't go up as much as I thought it would with a 1 day 8% drop
I am looking at the trade and wondering would it have been better to have entered as 2 separate verticals and been taking profits on the Call side on the way down and keep re-entering as the Call side reaches the 50% max credit and banking that cash and letting the Put side reach the SL and not re-enter a Put till it starts pointing up and I am back to neutral on my opinion
Does it really make any difference if the 10 delta Strangle (or IC) has a 80% probability versus 2 individually managed verticals each have 90% probability
Any thoughts are most welcome (I am relatively new to Options so please don't roast me if I asked a dumb question)
The naked strategy allows you to manage your winners more quickly, as compared to the defined risk IC strategy.
However, the drawback of the strangle as compared to the IC would be the theoretical unlimited risk as compared to defined risk with an IC.
Also, margin required for strangle should be higher than that of an IC (which is basically the width of the spreads minus the net credit recveived).
In summary, a strangle with 80% probability of success as compared to an IC with 80% probability of success:
- allows you to manage winners more quickly (theta will work faster with a strangle)
- allows the strategist to collect more premium
- leaves the strategist exposed to theoretically undefined losses
- leaves the strategist with a lower ROC due to the higher margin requirement for a strangle.
Not an expert here, feel free to add/correct me if i'm wrong.
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Ron, I'm interested to know if in your research and drawdown calculations are you looking purely are adverse margin adjustments based on maintenance margin on your initial margin for the position as well as any increases in initial margin imposed by the exchange? (which typically happens during times of increased volatility).
To me that can be a real curve ball when calculation margin movements, because the exchange could step in at any time and increase initial margin to whatever they see fit which could see a a substantial re- rating of the initial margin and existing maintenance margin on ones position, which could result in a sudden very large increase in margin forcing one out.
Just wondering if that's factored this into your calculation.
The CME rarely changes ES IM compared to other commodities. The last change to IM for ES was up on 7/25/14. Prior to that it was
up on 1/29/14,
up on 10/15/13,
up on 10/3/13,
down on 3/26/12,
down on 6/2/11,
down on 3/20/09.
They didn't raise it last year in Oct when ES was rising 158. They didn't raise it when ES was rising 240 in 2011. They didn't raise it after 9/11/01. They did raise it three times in Oct 2008. But it was pretty clear you shouldn't be selling puts then.
Volatility is good for the market and trading. The US economy is hitting on full cylinders, Greece has been going on for five years, and even though the Shanghai index has fell drastically it is still positive for 2015. Will we have a correction? maybe and I am down on my puts also but long term I think there is upside to the market
I think OX increased margin about 25%, for example, the SPAN margin for ESV51575p (98 DTE) is $576 today, but it is $759 in OX, the delta is also wrong, it is 0.01 at OX while it should be 0.0315 according to SPAN. Anybody has the same information for this strike in OX?