Saturday, May 22, 2010

Re: [TheOptionClub.com] Re: GS TRADE [was:How do you manage your Vega?]

 

On Fri, 21 May 2010 15:31:12 -0000, "JP" <jamesbparker999@yahoo.co.uk>
wrote:

>Ricky
>
>Please don't take this as being in any way critical, but I disagree completely with you regarding Cottle's book [Options Trading: The Hidden Reallity] as it contains many examples of dissections and synthetically equivalent positions.
>
>Michael's positions frequently end up with 'guts' options that can easily be plotted on a risk graph, but not easily understood from the raw data unless you apply some form of dissction.
>
>For example in the preface to Cottle's book he asks: what amount of money is the most one can lose with the following position:
>
>QQQQ trading at 37.30
>36 strike call at $1.70
>39 strike put at $1.90
>
>A trader buys 10 lots of the 36c / 39p strangle for $3.60 ea.
>
>Have a go at answering without using a risk graph ..
>
>Cheers
>James
>
I agree, James that there are plenty of examples in the book but not
enough information how to go about using dissections to make money.
Buying or selling a box can simplify a position, but I need guidelines
on where to look for such opportunities and how they lead to profits.
I don't see why it is a virtue, not to draw a risk graph. Using the
mechanical table method I have shown before:

10*39p
10*36c
Slope: -10 0 10
Payoff: 30 30
Profit: -6 -6
BE: 35.40 39.60

so the minimum result is -6 in the interval [36,39].

I did try to find use for one of Charles' ideas, decomposition in
terms of "baby butterflies". After staring at his description for a
while, I saw that any position, in s region where strikes are at equal
distances, can be decomposed into a positive or negative whole number
of baby all put or all call flies. This becomes obvious if you
realize that a baby fly has the property that its expiration payoff is
the distance between strikes at its center and zero at its wings. I
thought that maybe I could buy a wide fly, say, and then sell off most
of the ATM babies as the underlying hit various strikes in between the
wings of the wide fly. But I soon found out that even with well
traded stocks like Google, ATM baby flies have very large bid/ask
spreads so I was not accumulating much credit by selling them.

But if you can give me a hint as to where to look for the really
useful stuff in the book, I will try again. :-)

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