Ricky
I think you may be looking too hard to find the secret sauce [or algorithm] and it may be easier to try and develop a simple framwork to understand this type of trading.
1. Prior to expiration week the trades are generally limited risk / theta positive [long the wings butterflies / bwb's, short vertical spreads, short ladders, short outrights].
2. During expiration week the trades are generally limited risk / theta negative [short the wings butterflies / bwb's, long vertical spreads, short ladders, long outrights]
Although Michael and Charles Cottle express things using different terminology, much of what they say is very similar.
As an example, let's take Michael's adjustment on 18 May;
-3 135c /+5 140c $4.35 net credit
+4 135p /-2 140p $0.72 net credit
The real nature of the adjustment is not apparent at first; but if you dissect out 3x 135/140 box [+3c/-3p 135 | -3c/+3p 140]; you can see that the adjustment is synthetically the same as;
+ 1p 135 / +1p 140 / +2c 140 [$9.93 net debit]
So effectively Michael was buying in his short options risk at 135/140 strikes, which converted the position from a Butterfly type spread to a long strangle.
I have uploaded screenshots of Risk Graphs in the files section.
Cheers
James
--- In OptionClub@yahoogroups.com, Ricky Jimenez <rickyjim@...> wrote:
>
> I am sure the educational value is much more than the expected profit.
> ;-)
> I am fascinated by the last play. I am trying to discover the
> algorithm but have not succeeded, so far. You wanted to flatten the
> expiration graph between 130 and 150 and what you did was to add
> enough to the position to cause 3(00) short synthetic stock at 135
> and 2(00) long synthetic stock at 140. Is that an example of a famous
> trick that market makers are taught? It is vaguely reminiscent of the
> decomposition techniques that Cottle has in his book.
>
> On Tue, 18 May 2010 19:29:04 -0500, "mcatolico"
> <mcatolico@...>wrote:
>
> >Update 5/18/10
> >
> >Ho hum another 5 point day in GS. I knew as soon as I gave up on downside
> >leverage that Sam would come back to haunt me.
> >
> >Oh well getting this thing to risk free strangle today...
> >
> >Adjustments
> >
> >-3 135c/+5 140c $4.35 net credit
> >-2 140p/+4 135p $0.72 net credit
> >
> >Net position
> >-3 135c/+2 140c/+5 150c/+2 155c/+2 160c/+1 170c
> >
> >-1 165p/-2 140p/+3 135p/+2 130p
> >
> >Net overall credit is $45.25
> >
> >Not much left to do since this just acts like a couple 130/150 strangles for
> >about $5 net credit. Unless GS collapses from here (or rockets). This
> >should be the end of the trade. No idea how many contracts traded (someone
> >might tally them but I'd guess 100-150 or so which means after all said and
> >done a very modest $200-$300 profit on a very wild ride.
> >
> >
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