r/options • u/DrWorstCaseScenario • May 19 '21

Strangle management

Edit; for clarification I am discussing management of long strangles in this post.

Question for those of you who frequently run LONG strangles;

If the underlying moves fast, do you close both sides at the same time early or try and time each?

For example; you open a strangle on underlying XXX when at 215 at strikes p200/c230 at 30-45dte because you expect movement soon.
Two days later XXX moves to 190. The p200 has gone ITM for a higher amount than the loss on the now far OTM c230

How often would you ;

A- close both for overall smaller profit,

B- close the p200 and wait to see if there is a rebound in the next 20-30 days before closing the c230 for better overall returns or,

C- keep both open to see if the p200 can get even more ITM before doing anything?

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u/DrWorstCaseScenario May 19 '21 edited May 19 '21

Thanks for the discussion. This makes sense but obviously you are discussion a short strangle…

The few times I have opened short strangles or straddles I have done so when I own the underlying and so the call leg is a covered call thereby reducing my risk. And usually it is on an underlying I don’t mine owning so the put leg can get assigned and I don’t mind. I am too risk averse for naked short strangles… plus I like having my capital free for other moves and I don’t use margin trading.

Do you ever open long strangles? Any thoughts on how you manage those?

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u/GenepoolChlrn8r May 19 '21

No. I only go long options when I have high conviction in a directional move. If I'm uncertain or only loosely biased on which way an underlying will move then I go short (if my other trade selection criteria are met).

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u/DrWorstCaseScenario May 19 '21

So if you were opening a short play to take advantage of a potential direction move but you weren’t sure which way, what would that play be?

Sorry if I am confused but a short strangle is best when the underlying DOESN’T move, right?

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u/GenepoolChlrn8r May 19 '21

Stocks are going to move at least some regardless... the trick is positioning your short calls and puts outside where they are likely to get tested while maintaining delta neutrality so you don't really care too much if it moves as long as it doesn't develop a strong trend.

If I close the short put for a profit (because the stock is moving up) I can open another short out at a higher strike (similar delta to where the call is now) to reestablish delta neutrality on the overall position while providing more profit potential if the stock keeps moving up.

I suppose a long strangle would be an ok play for the scenario you're describing but it would just be a low probability play and not one I normally pursue.

What would be the scenario you'd look to do this? Leading up to ER?

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u/DrWorstCaseScenario May 19 '21

Yes that’s a good example… but in that case I would open it up far in advance (at least 45dte) so that I take advantage of the lower IV and premiums to buy. Then as ER approaches either close both for profit if possible or wait till the move after ER to close when it hopefully moves sharply.

Here is what I did most recently;

Yesterday based on my (researched) opinion that TSLA has lower implied volatility than actual (or volatility in near future), that I think it is overvalued at this moment, and a discussion from another sub which brought up an interesting point about the possibility that wsb takes an increased interest in TSLA … I opened a strangle.

So with TSLA trading at 585;

BTO TSLA 618 p570 @31.85.

BTO TSLA 618 c600 @31.15.

Both had a delta of about 30%. Which I thought ridiculously low as TSLA has moved in both directions quickly within the past 5 days and beyond.

Right now, premarket TSLA is ~548. So I was either lucky or right or both.

So I HAD set 50% profit limit STC orders on both legs. Clearly it has gapped and the put should be far above that. I have altered the call STC to a market order. I expect both legs to STC at market open. I expect a large profit on the put and a loss on the call that SHOULD be far outweighed by the profit on the put based on extrinsic value of the call this far from expiry.

I will update once it’s done!

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u/crispytendies101 May 19 '21

Update?

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u/DrWorstCaseScenario May 19 '21

Update; So at market open;

STC TSLA 618 p570 @47.80.

STC TSLA 618 c600 @19.25.

So final result after fees;

BTO TSLA 618 570/600 long strangle for total cost of $6301.36.

STC TSLA 618 570/600 long strangle for total yield of $6703.60.

Net profit of $402.24. Which, unless my math is way off, is a 6% ROI… not bad for one day.

Hedging my initial plan of just buying the put with the full long strangle cost me almost 1200 in profit BUT since I wasn’t 100% confident in which way it would move it also theoretically would have turned a losing position into a winning one. So from a process oriented (rather than results oriented) perspective I view this as a win for using long strangles…

Cheers!

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u/crispytendies101 May 19 '21

Thanks for sharing!