Hi shooter,
These are really good questions.
Hi WayneL
I've been paper trading on U.S. options. Since I'm not good at analyzing share movement. My main strategy has been either strangle or straddle type. I do realize that on top of all those criteria, how I buy call and put makes a significant difference on profit profile using Black Scholes model. Standard 1 call at X and 1 put at Y does not usually neutralize the delta unless (DeltaC = -DeltaP), and this makes the width of breaking even points to be greater than that of properly delta neutralized strangle or straddle in the early part of the game (first few weeks) and as a result, requires larger movemet of the underlying share price in order to profit.
Great points, and really exposes the nonsense of the options spruiker's usual schpiel on straddles/strangles. I only like them when all the planets line up correctly, then I rarely lose. But indiscriminate straddle buying is an almost certain loser over the long term.
Re delta neutral. Yep, you do want to truly neutral. You can do this a couple of ways.
1/ Only place the straddle on when it is neutral. In stocks, that is slightly below the strike. This is due to the cost of carry priced in to stock options.
2/ Use a synthetic straddle (using calls and short shares or visa versa) , creating delta neutral by adjusting the number of shares.
Other things to be aware of. Straddles/are a trade off of greeks. More time means less gamma, more movement needed to manufacture delta, more vega, less theta. Less time means more gamma, less movement to manufacture delta, less vega, but more theta.
Where you go in this regard depend are your view and exit/hedging strategy.
I appreiciate the effect of volatility. In some of my positions, both call and put made money because of the increasing implied volatility. In this case, strangle and straddle type make more money than just a single long put or call. The vega risk is a lot higher for straddle type but also return can be higher when IV goes up. It is now very important for me to acquire a volatility projection skill. Is there any recommended reading material I should cover for this??? Please let me know, I much appreciate it.
I will
eventually cover it in my site, but that's a way off yet. Sheldon Natenburg's Volatility and Pricing is probably the best though.
I'll say one thing, some of the standard dogmas are rubbish. The best thing IMO is the observation. Things to watch:
The volatility prediction capabilities of Implied volatility.
The cycling of volatility
The behaviour of IV approaching announcements; and immediatly afterwardss
I ve been working on a closing strategy for this type of strategy. But it is kind of tricky. Also I m working on a strangle strategy that starts off with delta neutral and as the time passes by ( after 2 or 3 weeks), the loss region shifts away from the original share price so that it serves as a neutral strategy in the beginning and if it is all quiet for awhile the shift in loss region may help the share price to hit the profit region.
Thanks for your time
Don't quite know what you mean in the second part of this paragraph.