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Kim

Straddle, Strangle Or Reverse Iron Condor (RIC)

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Kim,

I understand that your model portfolio is based on a $1000 of allocation per trade, and you do straddles/strangles for lower priced stocks and RICs for higher priced stocks.

My question is: Would you change anything if you had a much bigger allocation amount per trade? Say if you allocate $20K or even $50K allocation per trade, would you still use RICs or would you just use straddles/strangles to minimize the commissions.

Anything else you would change or would need to consider if you had large allocations such as these?

Thanks.

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Except for reducing the cost, the RIC has an additional purpose: to reduce the negative theta. Since you are selling options against the options you are buying, the sold options significantly reduce the negative theta. This is especially important when the options are very close to expiration.

Of course reducing the theta reduces the positive vega as well, so RICs come with reduced risk and reduced profit potential. The gamma is smaller as well, so if the stock moves, the straddle will usually make more than RIC.

I have seen many cases where RIC lost 12-15% while strangle would lose 30-35%. The opposite is correct as well. Some RICs made 20% while strangles would make 40-50%.

Since we don't know in advance if the stock will move, and IV will increase enough, I want to have a mix to have smoother results.

If you decide to trade strangles instead of RICs with short expiration, I would recommend to enter no earlier than 2-3 days before earnings.

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RE: "I have seen many cases where RIC lost 12-15% while strangle would lose 30-35%. The opposite is correct as well. Some RICs made 20% while strangles would make 40-50%."

 

Comparing parameters:

1) RIC with profit 20%/risk 15% and.. 

2) Strangle with profit 40%/risk 30%.

 

Isnt it still better investing half dollar amount to Strangle and have the same dollar risk like in RIC. Taking into consideration you have less legs to open which means less slippage and commissions too.  

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It is still the case, but I'm trying to limit those trades to the most liquid stocks so liquidity is less an issue. We need to adapt to constantly changing market conditions. Calendars are mostly pretty expensive, and RICs should provide good protection in this volatile market.  

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If I am reading this correctly, this is my summary I gather from the initial post:

  1. For a Straddle, we want the price of the underlying to be $20 or less.
  2. For a Strangle , we want the price of the underlying to be between $20.01 and $99.99.
  3. For a RIC, we  want the price of the underlying to be above $100.

Would this be a correct assumption?

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I made some changes to the original post. The prices are examples only, it also depends on IV - for example, straddle on high IV $100 stock might be still too expensive for small portfolios (if you want to keep 10% allocation) and strangle might be more appropriate. Since we are running 10k model portfolio, I'm trying to set trades that don't exceed $1,000 (or slightly more). So selecting between straddle or strangle will also be impacted by your portfolio size and risk tolerance, with strangle being the most aggressive trade out of the three.

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