Two-Step Strangles

Don’t buy both legs of the strangle at the same time. Whichever side is getting the most stress and therefore volatility, buy that side first. Then wait for mean reversion, and when mean reversion takes place sufficiently, then buy the other side, as its volatility will then be increasing — but wait for a sufficient increase.

Traders who buy both sides of the strangle at the same time are not taking maximum advantage of volatility. If the target asset is going down hard, then the bullish side will have low volatility, so buying the bullish side simultaneously is not optimal. If the target asset is rising sharply, then the bearish side will have low volatility, so buying the bearish side simultaneously is not optimal. If the target asset is not moving much in either direction, neither side will have optimal volatility. So it is NEVER advantageous to buy both sides of the strangle at the same time.

Whichever side you buy first, leg into it instead of buying all the contracts for that side at the same time. If your contract size is, for instance, 2 contracts for each leg, then buy 1 contract first and if the target asset continues in the same direction, buy the second contract at a better strike price than the first. Do the same thing for the other leg. Don’t kid yourself that you “know” how severe a move the target asset will make in either direction. You don’t, no one does.

Naked Calls

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