Tag: options

Credit Spread Adjustments: Delta Hedging with Stock

Credit Spread Adjustments: Delta Hedging with Stock

Trading Strategies
One of the most effective ways to adjust a broken out-of-the-money vertical spread is with stock. So many of us in the retail world—having been introduced to the flexibility and/ or leverage of options—seem hotly opposed to taking a position in an underlying stock, ETF or futures. Many of us would rather torment a simple vertical spread with layer upon layer of complicated adjustments, so that what started out as a hands-off strategy becomes a position that must be constantly tweaked—the original thesis for the trade reduced to a footnote. The Decision to Adjust Often the biggest risk to a credit spread is price: a trader establishes a position and price woefully moves in the complete opposite direction than anticipated. When trading out-of-the-money credit spreads, the general ass
What are straddles?

What are straddles?

Trading Strategies
With the implied volatility of the S&P 500 Index (as represented by the VIX) touching 18 and the 20 day Realized Volatility down at around 8%, I’ve been hearing quite a bit from students and colleagues about long gamma positions – straddles in particular. The idea is that volatility is so low that options are under-priced and should be purchased in bulk to profit from the impending price explosion. Without necessarily arguing for or against that position, what follows are some thoughts on what I believe to be very basic options strategy. The purpose of the straddle is to profit from either a gain in Implied Volatility or Realized Volatility (ie: a sudden change price movement). Since most beginning traders buy straddles in the hope of cashing in on an unforeseen breakout, it m