Dislikedscattergood,
I will need to read your posting over and over to understand it all.
My worst nightmare is that Short Strangles are unlimited lost if strike price going outiside of this strangle set.
So, I am looking for a way to calculate out when is my maximum lost = 0, then I will simply close them all out, before expiration.
Can you show us how to calculate out the pips we can tolerate for maximum lost = 0, while the strike passes each option? (before expiration)
RiverTraderIgnored
1) Worst nightmare -- your fear about the price spiking well beyond either strike of a strangle is the #1 issue about trading short strangles. However there are a number of things that make this fear not as big compared to traditional directional trading:
a) With the underlying at your strike (At the Money or ATM), the delta on the option is only .50. Meaning that for every 10 pips above your strike for a call or below your strike for the put, you only lose 5 pips of value. The delta for the option becomes higher the futher In the Money it becomes. Delta doesn't approach 1, where for every pip you lose a pip on your option, for hundreds if not a thousand pips ITM.
b) Forex options are European options, meaning you cannot be exercised against until the day of expiration. This means you are never forced to take a position and realize the full loss, it is always a paper loss until you close the options position or until the day of exercise.
c) You can always realize your loss and roll out the position, which is what I do. Let's say I sell a 1.5000 EURUSD 30 day Call for 25 pips, when the EURUSD is at 1.4500. Then let's say the EURUSD shoots up to 1.5000 in one week. And the option is now 100 pips to buy back. I am 75 pips down.
Well all I need to do is buy it back, netting the 75 pip loss and then sell another EURUSD call further out it time and price. I could sell the 120 call 1000 pips away for 100 pips possibly, and just wait for the time to give me back the value. What happens in this case is you just delay the realization of your 25 pips from 30 days to 150 days. But, do you really care? No, because the margin utilization is so good you are making $250 on $1000 over 5 months instead of over 1. You are still up 25% over the longer time frame, is that so bad?
The key is that whether you can depend on the liquidity to get you out. Certainly at the sizes we trade that is possible.
2) As to your comment "maximum lost = 0", I don't think I understand. You are NEVER not at risk until the option expires, theoretically. What I mean is that let's say you have a 1.5000 / 1.4000 strangle on the EURUSD. If there is 1 day left and the EURUSD is at 1.4500, it is THEORETICALLY possible for the EURUSD to spike 500 pips in 1 day and hit your strike, not likely but possible.