Our strategy is to sell out-of-the money options ( put and calls ), most of which
will expire within 1 month or less. In other words, our target is to sell strangles against
T-Bond futures primarily using the front month options.
We strongly believe there to be several advantages in a short strangle strategy
compared to trading futures outright:
1.) Out-of-the-money option do not have an "inner value" but just a time
value which decreases as the options livespan expires. This decrease
in the time value accelerates over time.
2.) By selling both a put and a call we collect two times a premium which
consists only of time value. Also, the risk only lies on one side of the
market as it is impossible to lose on both the call and the put. Yet the
combined premium collected extends the break-even point away from
the market on both the call and the put. In other words, the risk zone
of the trade is shifted farther away from danger due to the fact that two
premiums are being collected.
3.) We do not have to predicet exactly in which direction the market will
move. As time passes by the option loses its "time value" and will
expire worthless if the futures price is not beyond the strike price. And
as a logical fact it is more easy to predict which level the market may
not reach, than to predict if it is moving up or down.
4.) Less opportunities to make mistakes:
When you daytrade futures you put yourself in a situation where you have
to make a lot of decisions ( eg. when to enter, long or short, when to take
profits or where to put the stop ).
With our strategy we eleminate some of these decisions:
By selling both a put and a call we do not need to predict the exact direction
the market will move.
The timing when to enter a position is less crucial cause it does not make a
huge difference where the market is trading at the moment - we just choose
Taking profits happens sometimes by itself when the option expires wothless.
Controlling the risk of the trade can be done in two ways - either by buying the
sold option back, or by hedging the position with a future contract.