28 lines
1.8 KiB
Plaintext
28 lines
1.8 KiB
Plaintext
Greeks and Wing Spreads
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Much of this chapter has been spent on how wing spreads perform if held
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until expiration, and little has been said of option greeks and their role in
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wing spreads. Greeks do come into play with butterflies and condors but not
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necessarily the same way they do with other types of option trades.
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The vegas on these types of spreads are smaller than they are on many
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other types of strategies. For a typical nonprofessional trader, it’s hard to
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trade implied volatility with condors or butterflies. The collective
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commissions on the four legs, as well as margin and capital considerations,
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put these out of reach for active trading. Professional traders and retail
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traders subject to portfolio margining are better equipped for volatility
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trading with these spreads.
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The true strength of wing spreads, however, is in looking at them as
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break-even analysis trades much like vertical spreads. The trade is a winner
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if it is on the correct side of the break-even price. Wing spreads, however,
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are a combination of two vertical spreads, so there are two break-even
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prices. One of the verticals is guaranteed to be a winner. The stock can be
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either higher or lower at expiration—not both. In some cases, both verticals
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can be winners.
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Consider an iron condor. Instead of reaping one premium from selling one
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OTM call credit spread, iron condor sellers double dip by additionally
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selling an OTM put credit spread. They collect a double credit, but only one
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of the credit spreads can be a loser at expiration. The trader, however, does
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have to worry about both directions independently.
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There are two ways for greeks and volatility analysis to help traders trade
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wing spreads. One of them involves using delta and theta as tools to trade a
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directional spread. The other uses implied volatility in strike selection
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decisions. |