--- In OptionClub@yahoogro
> [...probably the clearest explanation I've yet seen for pinning]
> Perhaps a third trading strategy would be to buy at DITM gut strangle
early
> on Friday morning. Then you can sell the short ATM straddle legs
against
> the long DITM legs as the stock oscillates. Thanks very much, in
advance,
> for your comments....
>
> Mc - like your previous example you would be generating a lot of
premium for
> the market makers. And you would likely be making the wrong trades in
the
> sequence. The premium is going to be the greatest on the straddle at
or near
> the open so if you are going to sell it, that's the time.
In fact, I tried something very much like this last exp. Friday: sold
the GOOG 570 straddle for about 1.50, a couple of hours after the open,
then sat there all day and watched the stock proceed to pin only four
cents from the strike, at 569.96. That Jeff Augen book just earned its
keep, many times over!
The premium is certainly highest near the open: I could have gotten
perhaps 1.90 for the straddle earlier in the day. But GOOG bounced
around a lot at first, so it seemed better to wait until things settled.
After about 10:30, it never touched 569 or 571 again.
> That strangle is
> meaningless except as disaster protection in the event that somehow
during
> the trading day the underlying flies outside the bounds of the
strangle.
Well, that, and it also brings down the margin requirement enormously,
at least for those of us trading smaller accounts that don't qualify for
portfolio margining. At the same time as selling the above straddle, I
bought the 560p/580c "wings" for 0.03 each, which reduced the required
margin from well over $10k per contract to $1000. Yes, I know the IV on
those things is exorbitant, so I probably bought a nice lunch for some
lucky market maker, but it was well worth it.
A similar trade did very well last month, too, when GOOG ended up at
549.85, again just pennies from the strike.
Of course, this won't always work. On Aug. 21 it opened and closed
around 465, midway between strikes, with very little movement intraday.
A 450-460-470-
premium received for the short legs wouldn't have been nearly as high.
Also, GOOG is certainly capable of jumping one or more strikes -- though
I think it's significant that, if you look back at the charts, that
doesn't seem to happen very often on expiration day. Still, I make sure
to use alerts and/or contingent orders (and to stay glued to the screen)
in order to limit the risk.
Maybe I'm "picking up nickels in front of steamrollers"
I'm certainly not recommending this approach to anyone! But given the
large open interest on the GOOG ATM options, and the resultant hedging
that Michael described, it does seem to work well.
Martin
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