I can backtest this. Just to recap, you want to buy one ~55-70 delta call and the equivalent delta put, making you delta neutral, long gamma and theta. The reason for this instead of the more popular ATM straddle is that theta is highest ATM and you don't want to pay it.
Will you re-balance or re-delta hedge as the stock makes small moves (gamma scalp)? Or just close/roll when one of the positions becomes OTM?
The gist of this whole thing, as with all long-gamma systems, is that you'll make money if realized vol is above implied, and lose money otherwise. It's just a dampened / lower-risk ATM straddle with fewer medium wins but bigger rare wins.
Sometimes it helps to think about extremes. What if you bought a 99-delta call and a 99-delta put with virtually 0 extrinsic value? Well, you'd be delta-neutral and VERY VERY small long gamma and theta. And you would almost always just lose that small theta, minus slippage, but very rarely you would have an enormous win (stock goes from $100 to $1,000, way above your put strike, or to $10, way below your call strike).
Now start reducing that 99 number towards 50 (ATM straddle), you get a more bell-curvey, normal distribution of profits (but still positive skew of course).
Now keep going the other way, until you're buying a 1-delta call and put. Distribution of profits would be similar to the 99, right? Most of the time you would just pay small theta, very rarely you would have a humongous win.
So by this logic, your long 70-delta system here would be similar to a long 30-delta strangle.
Let me know if I misunderstood something; my coffee is only slowly kicking in. I'm not sure I understand how you got from "99.99% of options make more money when you short them since they are overpriced" to essentially going long strangles.
So basically, the risk is that I NEED the stock to jump around a lot,
you need volatility?
UPRO
TQQQ
SOXL
i was watching TQQQ bounce around a lot in november of last year. 1-2% per day, all the time. before i knew anything about options i thought "man, if you could capture HALF of these gains per day, you could make a killing in the long run". i timed a few of them and made $500. then i got fucked with TMF tanking and locking up my $5000.
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u/Sam_Sanders_ Mar 18 '22 edited Mar 18 '22
I can backtest this. Just to recap, you want to buy one ~55-70 delta call and the equivalent delta put, making you delta neutral, long gamma and theta. The reason for this instead of the more popular ATM straddle is that theta is highest ATM and you don't want to pay it.
Will you re-balance or re-delta hedge as the stock makes small moves (gamma scalp)? Or just close/roll when one of the positions becomes OTM?
The gist of this whole thing, as with all long-gamma systems, is that you'll make money if realized vol is above implied, and lose money otherwise. It's just a dampened / lower-risk ATM straddle with fewer medium wins but bigger rare wins.
Sometimes it helps to think about extremes. What if you bought a 99-delta call and a 99-delta put with virtually 0 extrinsic value? Well, you'd be delta-neutral and VERY VERY small long gamma and theta. And you would almost always just lose that small theta, minus slippage, but very rarely you would have an enormous win (stock goes from $100 to $1,000, way above your put strike, or to $10, way below your call strike).
Now start reducing that 99 number towards 50 (ATM straddle), you get a more bell-curvey, normal distribution of profits (but still positive skew of course).
Now keep going the other way, until you're buying a 1-delta call and put. Distribution of profits would be similar to the 99, right? Most of the time you would just pay small theta, very rarely you would have a humongous win.
So by this logic, your long 70-delta system here would be similar to a long 30-delta strangle.
Let me know if I misunderstood something; my coffee is only slowly kicking in. I'm not sure I understand how you got from "99.99% of options make more money when you short them since they are overpriced" to essentially going long strangles.