Straddle Management

[pmsinc 10]

I have a question about managing a straddle. Say I sell a straddle with a lower BE of 23 and an upper BE of 29 and underling about 26 currently. Not owning the underling I want to protect myself from it going against me.

 

I set a buy stop at 29 and a sell stop at 23 and make sure I am

either long or short the underling outside my profit zone. If it goes back in my profit zone I exit the long/short stock play and keep manaing it the same way.

 

Other than having slippage and or a gap for my entry what else can go wrong?

 

What am I missing?

[pmsinc 10]

I found a forum post that talked about this exact topic. It was about buying or selling at the BE points. But what if I managed the trade with a Long or Short the underling at my max profit for the spread.

So long at 26 Stop and reverse if below 26. I see a lot of commission if we are whipsawing at 26 though.

[Tams 20]

the first hurdle in trading options is managing commission.

 

even if you are right,

even if the trade goes your way,

you can still get slaughtered by the broker/MM.

[sneo 10]

manage ur greeks. trading the underlying as a hedge should be done infrequently and avoid if necessary as it involves spending ur premiums. Leaving the short straddle payoff unchanged and managing it with spot hedge can be damaging.

 

Spot hedges covers ur delta risk at a snapshot in time, but you will still be gamma short. So, the main idea is to transform the straddle payoff into something else with options too.

 

Asides using the spot, try pushing the strikes further as the spot swings higher or lower closer to the upper and lower strikes. an example when the spot shifts higher, you may want to cap the upside by buying a call with strike near the upper BE (after commissions accounted for) before the spot moves there.

 

all these assumes your commission is not high enough to wipe ur initial premiums collected out.

[thinkingfield 10]

depending on the market conditions, you can get a severe case of whiplash!! with neg gamma, you have adverse selection when you cover your deltas. you will be buying the high and selling the low. do this 2-3 times and say goodbye to your premium you took in from selling the straddle.

 

however, if the market is trending, you can ride the trend and use the straddle sale as a buffer if the market goes against you BUT not TOO much against you.