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Forex Options Strangle System

  • #121
  • Jan 10, 2011 4:34am Jan 10, 2011 4:34am
Quoting pipfirst
Hi Jameswebb,

can you please advise the spread in Interactive broker ?
and normally do you consider Delta before open position ? and can you please advise your delta range.


I choose ikonfx due the platform and free trial service.


Thanks n Regards,
MS
With Interactive Brokers you trade options on futures, the underlying is still EURUSD.
The options are traded on Globex, margins are much higher but spread is only 1 pip.

Pip value is USD12.50 and 1 futures contract on which option is traded has a value of USD125,000, so in effect it is equal to 1 and a quarter of one standard lot in spot fx.
Regards
  • #122
  • Jan 10, 2011 10:01am Jan 10, 2011 10:01am
Quoting pipfirst
Hi Scattergood,

do you pay attention on option margin value ? since I notice the number keep changing.

currently the price for selling EUR/USD @ 1.31 with expiry 20 jan 2011 worth USD 310. so actually the more near we sell to current price the delta will be bigger and we get bigger sell premium as well. It's correct ?

Thanks a lot for all senior explanation in here..

sorry for newbie question...


Thanks n Regards,
Managing margin is VERY important. You need to reserve enough in your account to absorb the margin and loss required to get to your roll point. Margin usage will vary from the point you put your position on until your roll point because delta will increase from .2 or whatever it is when you put the position on to .5-.6 at your roll point.

The inconsistent delta while the underlying moves towards your roll point makes calculating the amount of loss reserve a bit tricky. You should always reserve MORE than you expect or use a higher average delta to ensure tha tyou can get to your roll point.
  • #123
  • Jan 10, 2011 6:13pm Jan 10, 2011 6:13pm
US brokers trading globex only have a $20 spread during regular trading hours.
  • #124
  • Jan 10, 2011 8:43pm Jan 10, 2011 8:43pm
I add a sell put with the same expiry date with my yesterday sell call.

http://i53.tinypic.com/drfnnn.jpg

there is news that Japan will buy Euro Bond.. seem my sell call 1.31 will got burn and need to roll over.

Is there any other way not to roll over ? or can we combine with spot trade ?

Thanks,
  • #125
  • Jan 10, 2011 11:36pm Jan 10, 2011 11:36pm
Quoting pipfirst
I add a sell put with the same expiry date with my yesterday sell call.

http://i53.tinypic.com/drfnnn.jpg

there is news that Japan will buy Euro Bond.. seem my sell call 1.31 will got burn and need to roll over.

Is there any other way not to roll over ? or can we combine with spot trade ?

Thanks,
Notice your margin is down to 137 USD on 200,000 in positions. This is the power of delta hedging.

you may have to roll and you may not. Remember you only have 9 days to go, so theta will be very high. The option premium to buy them back goes down significantly every day with time decay at this short time to expiry. So even if you roll it may not be that painful.
  • #126
  • Jan 11, 2011 12:26am Jan 11, 2011 12:26am
Quoting pipfirst
or can we combine with spot trade ?
Should you choose to go down this path, once you have a real account they will give you a linked spot account. (ie. The margins do offset each other - there is no doubling up).
  • #127
  • Jan 11, 2011 2:10am Jan 11, 2011 2:10am
Dear S.,

Thanks so very much for your generous replies to my multitude of questions on page 7. Just seeing the answers now---its been a busy end-of-year. Looking forward.

My best,

Lenoxer
  • #128
  • Jan 11, 2011 3:06am Jan 11, 2011 3:06am
Hi scattergood,

the option premium goes down everyday with the time decay even the spot price go to strike price direction ?

btw, when you open another leg do you always match the expiry date ?


Thanks n Regards,

Quoting scattergood
Notice your margin is down to 137 USD on 200,000 in positions. This is the power of delta hedging.

you may have to roll and you may not. Remember you only have 9 days to go, so theta will be very high. The option premium to buy them back goes down significantly every day with time decay at this short time to expiry. So even if you roll it may not be that painful.
  • #129
  • Jan 11, 2011 5:34am Jan 11, 2011 5:34am
Dear Thread,

Trying to upload an attachment with my annotations from the Saxo Bank platform. Attempting to compare selling straddles vs. selling strangles. See William Gallacher's book, The Option's Edge (McGraw-Hill, 1999), chapter 8 as well as page 163 where he votes for selling straddles over strangles; oppositely, see SA Johnston's book, Trading Options to Win (Wiley, 2003), p. 171, where he votes for selling strangles over straddles. Overall, in this EURUSD example, straddle premium comes to $6975 and strangle premium to $1125. A straddle sale in this example will net you 6.2x the premium of a strangle. However, looking at the number of pips to BE (put pips plus call pips), a strangle only affords you an extra 136 pips of extra call protection (the difference between the BE point of the strangle and the BE point of the straddle) and an extra 206 pips of put protection. That means, in ROE terms, that you are giving up $5850 of premium for an extra 136 pips of call protection and an extra 206 pips of put protection. Put a different way, overall there are in total 342 extra pips of extra distance to your strangles (136 + 206) and you are giving up $5850 of profit for those 342 pips. That's the equivalent of $17 a pip of given-up profit. Perhaps, yes, you might have to defend the straddles more, but how much more? It seems to me, if this example is typical, that you are giving up too much profit to keep your anxieties tamed. Thoughts?

My best,

Lenoxer
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  • #130
  • Jan 11, 2011 7:19pm Jan 11, 2011 7:19pm
Quoting pipfirst
Hi scattergood,

the option premium goes down everyday with the time decay even the spot price go to strike price direction ?

btw, when you open another leg do you always match the expiry date ?


Thanks n Regards,

That's the race:

Premium - Theta (+ or -) Delta = ?

But if you have a put and a call it is:

Call Premium - Theta + Delta + Put premium - Theta - Delta = ?

If you are in a perfect strangle, then the call and put delta are even and it is pure theta. that doesn't happen perfectly but you get the idea.
  • #131
  • Jan 11, 2011 7:52pm Jan 11, 2011 7:52pm
Quoting Lenoxer
Dear Thread,

[font=Times New Roman][size=3]Trying to upload an attachment with my annotations from the Saxo Bank platform. Attempting to compare selling straddles vs. selling strangles. See William Gallacher's book, The Option's Edge (McGraw-Hill, 1999), chapter 8 as well as page 163 where he votes for selling straddles over strangles; oppositely, see SA Johnston's book, Trading Options to Win (Wiley, 2003), p. 171, where he votes for selling strangles over straddles. Overall, in this EURUSD example, straddle...
There are a few problems with this analysis:

1) ATM and ITM options are MUCH more sensitive to delta and vega. The 500 Pip OTM 37 day EURUSD Put has a delta of .19 and a vega of .0011.

The same 37 day ATM EURUSD put has a delta of .49 and a vega of .0016.

What this means is that your account is MUCH more effected by price changes (delta) and by volatility changes (vega) during the life of the option.

When you get to expiry, you analysis is more correct, but during the life of the option, not so much.

2) ATM and ITM options start using margin at a much higher rate. Again the .5 delta of an ATM options is much higher than the .19 of the OTM options. The net effect is to use 2-3x the margin for the same position.

3) Profit calculations aren't quite right. You are focusing ONLY on the BE points, and not anything in between the strikes of the Straddle and the BE points. In your example you make 279 pips on the Straddle, so if the EURUSD moves 250 pips you keep 29 pips.

However on the Strangle, you make 45 pips and keep ALL of it on a 250 pip move. In that case which is better, a straddle which has lower margin, lower loss reserves, and higher profitability or a straddle that has higher margin, higher loss reserve, and lower profitability?

The point is that at expiry in a straddle you LOSE money for every pip the underlying moves from the shared strikes. You just hope that it doesn't move more than the money you collected.

In a strangle you only LOSE money at expiry if the price of the underlying moves beyond your strikes, which are pretty far out to begin with.

It isn't that straddles don't have their uses, but it really has more to do with your comfort zones.
  • #132
  • Jan 12, 2011 3:17am Jan 12, 2011 3:17am
Hi scattergood,

Firstly, thanks for sharing your strategy I am really enjoying it.

Have you looked at using IG Markets for this strategy or any comments on them generally ? They seem to offer the options you use. ( I think).
  • #133
  • Jan 12, 2011 4:35am Jan 12, 2011 4:35am
Why not try out a demo account for yourself? Personally I found their currency options offerings rather limited.
  • #134
  • Jan 12, 2011 8:57am Jan 12, 2011 8:57am
Quoting waltini1
Hi scattergood,

Firstly, thanks for sharing your strategy I am really enjoying it.

Have you looked at using IG Markets for this strategy or any comments on them generally ? They seem to offer the options you use. ( I think).
I have tried them, and find their software difficult and the number of options limited.
  • #135
  • Jan 12, 2011 5:08pm Jan 12, 2011 5:08pm
I started an options trading discussion thread that didn't take off, so I thought I'd ask some questions here (hopefully mostly on topic).
I picked up some demo EURUSD contracts last week when price was right at 1.2900. I'm having trouble understanding some concepts and specifics displayed here.

Value - how much I get when I close the contract?
P/L - the Profit/Loss I will get if the option were to expire right now?


1.2850 Short Put - I'm not sure I understand how European payouts work. The Open Price of .0076 tells me I should get a premium of $76 if the option expires in my favor? How does P/L affect this?

1.2900 Long Call - the open price of .0109 basically means I was hoping for price to go above 1.3009, which it has done, giving me 100+ in profit.

1.2900 Long Put - This has gone 230+ pips away from where price was when I opened it (1.2900). I can't figure out why the loss is only 133.

1.2950 Short Call - Price moved 180+ pips from the strike on this one, but loss is only 150?

1.3250 Short Call - an experiment in extremes, hopefully explained by understanding the other short call.

If there is a post on this thread that answers my questions, feel free to direct me there. I read here that delta/theta affect P/L, but I don't understand it as applied to a real situation like this.
Thanks.
Attached Image (click to enlarge)
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  • #136
  • Jan 12, 2011 11:56pm Jan 12, 2011 11:56pm
scattergood, appeciate your time and efforts here explaining the system. I''ve always wanted to learn options but never had the chance I guess. However I have a 'dumb' question regarding to what's happening at the time of expiration.

Quote
Selling a strangle:
ASSUME: EURUSD @ 1.42500
Sell 100,000 EURUSD Call @ 1.4500 Nov 19 Expiration = 0.0190
Sell 100,000 EURUSD Put @ 1.4000 Nov 19 Expiration = 0.0196
Total revenue: 0.0386 x 100,000 = $3,860

You get to keep all the revenue as long as the EURUSD stays between 1.4500 and 1.4250.

I'm a bit confused here. You are saying the price should stay between 1.45 and 1.4250 in order to keep all revenue. But the range between the strikes is 1.4 to 1.45 What about at the time expiration EURUSD is @ 1.4050 ? It still above 1.4000 stike. Do you get the full Put premium or it's been calculated in some other way ?


Regards
  • #137
  • Jan 13, 2011 12:40am Jan 13, 2011 12:40am
Quoting agent6488
I started an options trading discussion thread that didn't take off, so I thought I'd ask some questions here (hopefully mostly on topic).
I picked up some demo EURUSD contracts last week when price was right at 1.2900. I'm having trouble understanding some concepts and specifics displayed here.

Value - how much I get when I close the contract?
P/L - the Profit/Loss I will get if the option were to expire right now?


1.2850 Short Put - I'm not sure I understand how European payouts work. The Open Price of .0076 tells me I should get a premium...
Ok, let's tackle these one by one:

1) IN your Short Put of 10K EURUSD 1.2850 Strike you collected 76 pips or $76 in premium in your account. It is already in your account's cash balance. For collecting the premium on this short put you have the OBLIGATION to sell the holder of the option at expiry 10,000 EURUSD at 1.2850. You can buy back this obligation and get your self out of it for 15 pips, or $15. Normally that should give you a profit of $61 but my guess is that saxo charges you $20 for trading such small lots. I believe all of your P/L's are $20 light.

2) The Long Call of 10K EURUSD at 1.2900 strike means that you have the RIGHT to purchase the EURUSD at 1.2900 at expiry. You paid $109 for that right, so you don't make money at expiry unless the the EURUSD is above 1.3009. You can sell that right for $238 right now and make $109:

Sell for $238 - Buy for $109 = $129 - $20 charge = $109 in profit.

3) Long Put of 10K EURUSD with a 1.2900 strike. Even though the underlying has moved 230 pips, you don't lose 230 pips in the option price. You lose less that that because there still is time for the market to reverse and come back down. Delta, or the % change of the option price of the underlying's change is price will never be 1.0 but some lesser amount. This is why you only lost 133 pips on 230 pip move. Further, for all purchased options you can NEVER lose more that the premium you paid.

4) See above. Delta is never 1 so you don't lose at a 1:1 pip ratio on the option for the EURUSD's move.

Hope that helps.
  • #138
  • Jan 13, 2011 12:41am Jan 13, 2011 12:41am
Quoting JimboFX
scattergood, appeciate your time and efforts here explaining the system. I''ve always wanted to learn options but never had the chance I guess....
You are correct, the premium is kept if the range is between 1.45 and 1.20.

1.4050 is above the lower strike and you would keep ALL of the premium if this were the price at expiry.
  • #139
  • Jan 13, 2011 12:54am Jan 13, 2011 12:54am
Hi scattergood,

my sell call EUR/USD @ 1.3100 hit by the price. Do I need to directly buy back and roll it ? or I wait for some more day ?

http://i55.tinypic.com/110giso.jpg

any suggestion ?
  • #140
  • Jan 13, 2011 9:51am Jan 13, 2011 9:51am
Quoting scattergood
my guess is that saxo charges you $20 for trading such small lots.

Sell for $238 - Buy for $109 = $129 - $20 charge = $109 in profit.

3) Even though the underlying has moved 230 pips, you don't lose 230 pips in the option price. You lose less that that because there still is time for the market to reverse and come back down. Delta, or the % change of the option price of the underlying's change is price will never be 1.0 but some lesser amount.
Thanks a lot, very helpful. I will have to look further into Saxo's fees. I wasn't able to find anything last time I checked.

Why was my profit on the Long call almost pip for pip $238 if delta is supposed to lessen it?

Quoting scattergood
1) IN your Short Put of 10K EURUSD 1.2850 Strike you collected 76 pips or $76 in premium in your account. It is already in your account's cash balance.
I didn't see an immediate increase in cash balance when selling/writing options. Does European style pay out immediately when writing?
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