Risk on combined spreads

#1

I was trying out combining two spreads ( to make a hedge or spread with a better price ) and was wondering if I am calculating the total risk on the trades correctly.

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#2

1st Example

Sold for 105.45 and bought for 105.64 the risk on the trade is .19 or $19

However you wont make that risk back and get into profit untill one of them stops loosing (ie it gets below the floor of the bought one by 19 ticks 103.5 - .19 … or above the ceiling of the sold one - 106.00+.19 so yes your risk is low but the market has to move quite a bit or you just locked in a loss.

This can slightly be seen in the risk/reward graph (though you must add in the loss from the other side that must be made back as well.

This trade is essentially trying to pull off a cheap straddle with a movement required from 103.31 up to 106.19 from an approximate price of 105.58

Also you must cover fees and bid/ask spread if exiting early.

I also call this a Siamese Straddle. Basically buying two deep in the money options crossing over. You Can also do a Siamese Iron Condor to collect the premium if you believe the market will be range bound.

2nd Example

Same as Siamese Straddle but with no downside profit potential.

Bought at 1328.8 and sold at 1328.6

They both have the same floor so the sold one will cover the bought ones loss but no more than that essentially locking in the small .2 or $2.00 loss if the market moves down.

In addition like the first example the market must move up to the point that the sold one stops losing at 1350 plus the .2 and any feeds and bid/ask spread.

Since Gold is at about 1328 it would have to move a bit over 12.0 points before profitable. Since the average deviation on Gold is 8 this is a lower probability trade. However, if id did move up you do have a potential to make as much at 50.0 (5x the expected move and way beyond 3 deviations so very very rare). Its not a horrible trade. Its just one you would have to put on every day for those few days here and there that hit. Go back and look at a Gold chart to see how often it moves that far and if you wold be taking profit or holding till expiration. If taking profit by what price (movement) would you take it etc…

In either case you are requiring a decent size move for a profit. Not a bad strategy in and of itself but combining this with news specifically large news events may server you much better and with the expectancy it will lose often but the loss will be small compare to the occasional (very rare) big profit.

#3

Lots of good information to think about, thanks.

#4

I covered this strategy a bit back in 2012 :slight_smile:

We are developing the scanner 2.0 version which will have the ability to mix spreads, binaries, and underlying together for live risk/reward model analysis.