Friday, November 5, 2010

New idea

A friend of mine passed on an idea that kept my mind thinking and thinking.. I figured he was onto something and it sure seems that way! His suggestion was to use a broken wing butterfly or another type of trade in lieu of the back-month long call as a way to hedge my deltas. This optional trade could have a profile that added theta instead of simply being negative theta and could also be set up not to hurt as much if we backfire to the down-side.

I've looked at a broken wing butterfly as an option, notice the two profiles bellow. The first is the front-month BWB and the second is a long back-month call. If we keep going up, the BWB will provide theta to the trade, while the long call will keep robbing me of theta. If we stay around the same level the BWB will not lose that much money, and if we back-fire they both seem to have the same rate of loss.

The key difference here is Vega and Theta. I have to do some more research and perhaps run a parallel Butterly next month with this option in play to see how it behaves in real life situation. For now it is just an idea to explore. Looks like a great idea though.. Thanks!

11/05 Daily Summary

Very brief update Today, after all, it is Friday and I can welcome the break! I've added an extra butterfly this morning to increase my position's Theta and help pay for the cut and roll costs from a couple of days ago. The market also did its job and stayed quiet, allowing the position to take a break as well. I do hope it backs off a bit or stays quiet Monday so I can take on the weekend's worth of theta. For now, relax and enjoy the weekend!! Cheers!