Take the Cash and Leave the Sound of Distant Drums

Sometimes, our metaphorical “Battle of Midway” can’t or shouldn’t be fought. In our continuing example, I finally did manage to buy several JOX 90 straddles on May 16, at 790 points, with the OJ market right near 90 cents.Oh, I overpaid a little, not a doubt of it, and regretted it, too. Gave myself the rare privilege of spending about 65 days just watching the orange juice market do nothing. JOX dithered within a 5-cent total range from mid-May to mid-July, and this, my friend, defines “dead in the water” perfectly.

The straddle fumbled its way down to 650, then 630 and I spent my time trying to ignore this morticians’ market and finding some profitable trades. Then,out of the blue, a report surfaced that, due to the low level of spring and early summer rainfall in Florida, the juice content in the Florida crop this year would be 12–15% lower than last year. JOX popped up to 101.20 in about 10 days and I couldn’t get out of the trade fast enough, throwing back the straddles for between 1120 and 1160 points during this period.

Too quick to exit, you say, sold them out too cheaply? Maybe, and so far you’d be right, because JOX has moved right on higher, to 106.40 tonight, and looks as if it might keep on rising. That’s fine with me, and good luck to the OJ bulls. I was losing capital, the market gave it back and tacked on a profit not much less than that originally anticipated. Now I should be complaining?Not a chance; I’m delighted. If JOX moves on up to 120.00 or into that

neighborhood, I’ll just shake my head ruefully and mark the experience down for next year: be a little greedier . . . but not much. Meantime, if the volatility of the options dips back down somewhat, there’s no reason not to try this
strategy again in the March options later in the year, is there? Perhaps a good time to try it might be in the low gross-volatility month of September, conditions warranting.Half a Loaf, and Frequently the Whole Thing—Strangling a

Market The approach we want to take in selling put-call pairs is to move away from ATM striking prices. In the best possible case, we’d like to apply the nonseasonal strategy twice in the same trade, to apply it in both directions in a
single market. Outrageous? Fantasyland? Hardly. All we need to do is take our usual look at current volatilities and historical tendencies, because opportunities for such trades turn up every so often.

When the historical gross price movement of a market is moving lower from month to month at some time during the year, and its options’ IVs are not falling (or not rapidly), profitable examples of these trades will likely appear. Just as the tables in Appendix A are useful for helping us decide when to buy a particular straddle,they’re also helpful in this strategy for selecting time frames within which to strangle a market.

A strangle, as described earlier, is the paired sale of an OOM put and an OOM call having the same expiration, and it’s a highly advantageous strategy when we can meet certain not-very-restrictive conditions. The distance between the striking price of the call and that of the put is the width of the strangle. Oh, I know what you may be thinking right now, “Aw, what is this? You talk about writing WOOM options for a non-seasonal trade, and about being careful because good disciplined ones are a little hard to find.

Now, I’m supposed to find what is basically a double non-seasonal? Why not throw in a four-leaf clover and an honest politician, too? And a unicorn, while you’re at it. Sheesh!”You surprise me. After all this time, now, out of the blue, you consider that I’m advocating some sort of Ponce DeLeon Memorial Trade, something wonderful if you can find it, but that doesn’t actually exist? No chance. Such opportunities occur reasonably often.

I’ve never tried to count them up, but I’d be willing to wager quite a tidy sum that we can locate about half as many good, disciplined strangle trades as we can non-seasonals over a year’s time.Just read on and you’ll see why this is so.Writing a put-call pair with the put having its striking price below the market and the call having its strike above, a strangle, is approximately the logical inverse of buying a straddle.

When we buy a straddle, we want a market to move somewhere over a longish period of time, don’t care where, just move, drat you! When we write a strangle, we want a market to move either nowhere or only a little bit over a severely limited period of time. Why should a promising strangle trade be difficult to find?

Haven’t we agreed long since that, in many trades in our personal experience, a market has done nothing for quite a while—frequently irritatingly so? I believe we have. Why not then take advantage of this non-movement, provided we can determine that such non-movement is likely over a particular period? I can’t think of a single reason.