Ray's synthetic straddle experiment

Original Method

• Pick a stock that think will tank hard
• Buy 1 OTM put and 10 shares of stock
• If rips, sell the 10 shares.  If drops, buy more shares
• Stock should be making big swing or large range bound.

Key point:

• Delta increases as the stock goes to one direction
• Commission is problem with TOS
• Good when IM is low as Put is cheaper
• Dont be afraid to use this when not sure in direction
• Summer is perfect for this as mkt makes big swing and unpredictable
• We not bank, can be flexible
• Watch VIX or Impiled vol to decide the put
• Raymond said the trader usually has 50 shares for each put when hit the put strike.  I think it means they want to maintain delta neutral.
• Raymond suggests not to do it on stock/ index that don`t understand
• This strategy can be used for bullish long term, bearish short term.

Experiment

1) Original version:

• buy 1 OTM put, buy 10 shares
• keep buying on dips and be 50 shares when strike hit (delta neutral)
• Initial capital needed: 809
• Capital needed when hit support (strike): 3294
• Potential capital needed for the full size: 6194
• Average share price when stock hit support ($58): $64
• Profit % if stock goes back to current price ($68): 6.25% ($200/ $3200)
• Best to apply this on individual stock as it can go a lot lower than index

2) Vertical:

• buy 1 66/58 vertical.  10 shares
• keep buying on dips and be delta neutral when sell strike hit (40 shares in this case)
• Close the whole thing when stock hit $58
• Initial capital needed: 866
• Capital needed when hit support (strike): 2736
• Potential capital needed for the full size: 2736
• Average share price when stock hit support ($58): $64
• Profit % if stock goes back to current price ($68): 6.36% ($163/ $2560)
• Best to apply this on index or cash-heavy company as it has underline support

3)  Butterfly or back ratio

• Not a good one on this.  Delta decrease dramatically on butterfly as it approach the strike.  Therefore, there is no need to add share on the way down
• Back ratio (eg, buy 2 OCt 58 put, sell 1 63 put) is good for raising Vol but not very good for negative delta.  
• Both good if do alone without adding shares because they do not have big delta anyway