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incandenza

Short Strangles - a Question

By incandenza, in Beginners Forum

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incandenza    10

incandenza
Posted

Hi folks - I'm hoping someone with more experience can help me get my head around a concept.

 

I'm looking at options trading strategies, and am studying short strangles. Assuming you didn't have the ability to monitor a short strangle 24/7, you'd want to put stop losses on the position.

 

How would one go about doing this using the spot market to render the position neutral at certain trigger points? (i.e. without limit buy/sell orders on the options themselves).

 

So assuming you put down a short strangle on GBPUSD, you would sell a put and a call out of the money, make the premium and wait for expiry hoping the GBPUSD didn't move beyond your strike range. What limit orders should you place in the spot market in order to limit the downside of this otherwise crazy-risky position?

 

Before anyone looks at me askance, I am not currently holding an uncovered short strangle, nor have I ever, this is a theoretical question.

 

Many thanks in advance...

 

Inc.

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symbios    10

symbios
Posted

I trade options on stocks for almost 2 years now and i do a lot of strangles and naked puts/calls. I've not done any strangles on forex nor do i intend to for various reasons.

 

Now, back to your question. When i trade strangles on stocks, i usually look for a couple of things. First, the volatility of the stock followed by support and resistance. I always try to pick stocks which are that volatile to begin with and i always look for intermediate support/resistance levels. Those would provide you with a mental stop on when to get out. If possible, have multiple support/resistances as buffer between your strike price and market price.

 

Relating to stop-losses, be careful of sudden spikes in volatility which could trigger your stop-losses even when the strike price isn't breached. To make matters worse, the fill price might just be ridiculous. My method is to have a mental stop instead of a physical stop. Coupled that with price alerts on my handphone, i normally have time to react to major events.So far, i've not had any major losses for the past 2 years of trading. :)

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