Hi Ananth
I got a PM from a member which did not know where to place the question. As it is again related to spread trading, in this case a bit some thing out of the box, I post the PM and the answer here, so others which may are also interested in it can profit from that.
Here the PM:
Dear Dan
I am sending you a PM, since I did not know which the appropriate thread to post this query is. Since Sept, nifty options are available with 50 points gap against 100 points earlier, I feel that one can take advantage of this development to play short strangle with better hedging possible.
-If I want to play very safe, I can write Oct 5900 call and Oct 5100 put for a total inflow of 121 + 73 = 194 points.
-I can simultaneously buy Sept 5950 call and Sept 5050 put for an outflow of 34 + 21 = 55. The net inflow therefore will be 194 - 55 = 139 points.
Since the maximum loss before Sept expiry will be 50 -premium received; there will be no possibility of loss since the net premium received is more than 50.
This can be further fine tuned by selling options when the vola is high and buying options when vola is low and by legging in call and put options.
I am thinking of this strategy based on the interaction I had with you in the past and by reading "The Option Trader Handbook" recommended by you.
The "Unlimited Loss" short strangle can become a "NO loss" strategy.
Is there any flaw in this strategy since it sounds to be too good to be true?
Sorry to disturb you during the week end.
Thanks and regards,
Hi
What you talk about is finally a "Long iron calendar condor". You have on both sides a vertical calendar spread, one with the puts and one with the calls. That is the final strategy, even if you talk about a short strangle. But you converted that short strangle by adding a long strangle from this month series and that makes it finally a long iron calendar condor.
This kind of strategy faces the risk with IV and gives us advantage about time decay. Most call that kind of trades: Income strategy. It is also a net credit trade. Best when market moves in a range and vola is not much oscillating. Profit is capped and risk has to be considered as to be watched closely, as outside break evens you could be badly hurt in worst case scenarios.
Now whatever strategy you play, it is the specific trader who makes them safer by knowing when and how to adjust them. To say from my side: Yes it is perfectly a non risk play, would give the wrong impression to that. The way you implement this long iron calendar condor has a huge range. Even then: In case Nifty rushes up from now let’s say 300 points, you will need to know what to do, as your break even on the call side (call calendar spread) is in danger. Be very clear about that and be prepared to act when it comes to that event. So the strategy has its advantage and disadvantage.
As you wrote:
This can be further fine tuned by selling options when the vola is high and buying options when vola is low and by legging in call and put options, these steps are also called adjustments’. Here some food for the brain about that:
http://highprobabilitytrading.org/a-critical-look-at-option-trade-adjustments/. Adjustments on the break evens have to be tested in advance and to be in place in your head, so you can act quickly if needed and not first have to think what you should do now in case the event knocks on your door.
Take care / DanPickUp