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

 

Ricky

Difficult to say where you would get most benefit from Cottle's book without knowing your trading style ... maybe useful if you posted some sort of sample trades and we could start there ... like you, I don't find the concept of selling off embedded flies very practical ... but it is based on exactly the same concept when Michael says that the priority during expiry week is to buy-in risk ... and if you take Michael's last adjustment he effectively converted a fly into a strangle ... equally dissecting out the flies is done to reveal residual risk that is often non-transparent and can be dealt with quickly when the opportunity arises ... if I had to make a suggestion, from memory, I would go with the chapters on verticals and wingspreads ....

Have a good weekend
James

--- In OptionClub@yahoogroups.com, Ricky Jimenez <rickyjim@...> wrote:
>
> On Fri, 21 May 2010 15:31:12 -0000, "JP" <jamesbparker999@...>
> 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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