Short Straddle... virtual arbitrage component

Most "experts" warn against the short straddle because it leaves the deriviative seller at risk of unlimited losses. While this is true, a key element added to this strategy can create a virtually risk-free profit machine. We observe this same phenomenon with various compounds. For example, Hydrogen combined with the element Oxygen (ratio of 2:1) creates water. The most stable and a most essential compound to our existence. In like manner, combining a short straddle with money management and a semi-martingale twist can create a stable and essential income stream.

More specifically, if after entering the short straddle (on stocks or currency pairs or futures), immediately set the stops (stop loss) at break-even for the calls and puts. Thereafter if it call or put reaches break-even, then the specific option is closed and a new short straddle is created.

Walt

The short straddle would have a 1 - 3 month expiration date. Personally, I believe that a 2 month short straddle is best. The theta and vega impact works wonderfully in your favor.

Walt

Does anyone have an opinion on short straddles in-the-money?

Walt

Short guts are too dangerous for my liking. For the past few months I've been selling covered premium, and only recently sold an option naked (but I was very confident as to the direction of the currency pair in question).

Your "virtual arb" sounds interesting... could you give a working example as to how one would work? Sadly, I couldn't even try this strategy even if I wanted to. My particular broker does not have stop orders (or limit orders) available for options.

Sell option & sell put (short straddle) in the money with an expiration of 1 - 2 months away. When & if the price of the underlyer (currency or stock) goes up or down by the amount equal to the offsetting option, then close out the given option at a break-even status and re-issue another short straddle at the money if within 30 to expiration or in the money if more than 30 days to expiration.

Although this works well with currency options, equity options may provide better or more favorable odds for the options seller.

Walt