Portfolio Management/Diversification applied to options trading

[mks212]

When investing a portfolio in stocks/bonds, you always hear the word "diversify." Simply put, you don't know which asset will perform best or worst, so buy a bunch that do not move in concert and you will always be protected.

I wonder how we can apply that to options trading. For example, long straddles are facing headwinds due to low volatility across the board. However, calendars are doing pretty well.

Are there any other trades that we can put on to help balance things out?

One thing is that both long straddles and calendars are long vega. Would it make sense to do a short vega trade in case IV slips further?

Another point is that calendars seem to be more sensitive to gamma than straddles. So a big move will hurt the calendars more than the straddles will benefit.

Thanks,

Mike

[Marco]

I wouldn't call it diversifying as with a multi stock- or multi asset portfolio.

When you trade options you should keep an eye on your overall 'greeks' (delta, gamma, vega, theta mainly) and (re) balance them according to your market view and risk appetite. So you may want to keep your delta fairly flat if you want to be non directional and prefer to have vega long positions in an environment with VIX at 13 etc etc.

 

SO has that approach and balances long gamma earnings trades with short gamma calendars or IC's for example.

 

your broker hopefully has some sort of risk management tool that displays the greeks of your position (Risk manager at IB)

m.

Edited February 8, 2013 by Marco

[mks212]

Good points Marco. Thanks.

your broker hopefully has some sort of risk management tool that displays the greeks of your position (Risk manager at IB)

m.

Yes, I use TOS and they display that very prominently.

[Kim]

We had a discussion about balancing the portfolio here - http://steadyoptions.com/forum/topic/86-balancing-your-portfolio/

 

It is correct that we want to balance the vega as well, and with IV at "normal" levels (16-18) I would do it with IC or butterfly. I just think that with current sub 13 levels, going short vega is too risky.