r/options
Long 180dte straddle + short OTM weekly puts on the Swedish index
Author shares a defined-risk options strategy on the Swedish OMXS30 index, buying a 6-month straddle and selling weekly OTM puts to finance it.
- Low VIX equivalent provides a favorable entry point for buying long-dated options in the straddle.
- Positive delta exposure allows the portfolio to benefit from upside moves in the index.
- Defined-risk structure with a clear plan to roll short puts and collect premium to offset initial costs.
- Decreased volatility means the premium collected from selling short puts is currently lower than ideal.
- Requires active management and rolling, exposing the trader to execution risks if the market drops sharply.
I have started a new trade on the Swedish OMXS30 index today (chosen due to tax reasons) where I bought a 6 months straddle slightly above the spot price, and I plan to sell weekly OTM puts against it.
I just wanted to share the trade because I like the structure, and having to write it down makes me think more clearly about it. I ran a similar trade earlier this year and it was profitable, but I felt like I didn’t fully understand all the trade-offs and wasn’t comfortable continuing it. I want to give it another try as I like to think I’ve learned more since then.
Trade legs
Spot price at the time of trade: 3160
BTO Dec 3200 (Δ50) Call @ 145.5
BTO Dec 3200 (Δ50) Put @ 152.5
STO June 26th 3100 (Δ30) Put @ 10.75
The long call is there to profit from the index going up. I want exposure to the index and I want my delta to be positive. The short put is mainly there to finance the trade. I won’t sell puts too close to the long put, ideally at 3100 max. The long put is hedging the short put to make the trade a defined-risk trade.
So, the max loss for this trade is 287.25, but I should be able to bring it down as I roll the short put.
Timing
The VIX equivalent for the index has come down on the Iran deal news and was around 16 today. This means the long dated options I bought are in their lower price range, and it’s a relatively good time to enter this trade. It meant the premium on the short put was a bit too low, but I hope upcoming weeks and months bring better premiums.
Managing the trade
I will mainly keep rolling the short put, not above 3100 to not break the max loss. If the index is getting close to my strike, I will roll it out and down but enough to get 10-20 premium per week. If the index then goes back up, I can always roll the put up again and collect more premium.
I have considered a few scenarios for the upcoming weeks and months and how I would manage the trade.
- The index tanking
I will defend the put as long as I can receive a reasonable premium for it. This is a bit of a double-edged sword, if the index hovers around my strike, the rolls can be very profitable. But if the index falls down much lower, I probably can’t roll for a credit. If that happens, I’ll accept the loss and close the trade, you can’t expect to make money in every scenario.
- The index staying around the same level
Given that the trade is theta positive and I can keep it like that in this scenario, this sounds like an OK scenario for the trade. The short put decays faster than the long-dated straddle, so I should profit in this scenario.
It might become challenging to stay theta positive if the index rises slightly while volatility falls even lower, making the premium small compared to the theta decay. An option I can consider in this case is to simply close the trade, probably with some profit from the accumulated premiums.
- The index rising
This is the most interesting scenario in this trade. The straddle profits from the index rising, the higher the index goes the better. The short put won’t be enough to make the trade theta-positive, but I can probably start selling longer dated calls at 3500 or above to make it theta-positive again. I will be cautious when selling the calls though, I don’t want them to cannibalize the profit potential of the trade.
Exiting the trade
As time goes on, the time decay on the long put makes keeping the trade theta-positive more and more difficult. When that starts to happen, I’ll consider closing the trade and opening a new one. I don’t expect to keep this trade alive when the long options are less than 60dte, but we will see how it goes.
I might also consider closing the trade if the index rises or falls significantly. If that happens, it probably would make sense to lock the profits from the straddle.
Why not a longer/shorter dated straddle?
This is one thing I struggled a bit with. I’m not sure if 6 months is the right duration. The longer the straddle, the lower its theta and the easier it will be to manage the short legs. But it also increases the max loss of the trade, and if I want to sell calls at strikes that wouldn’t erase all my profits, it’s better to have a lower entry price. In the end I picked 6 months because the net theta and delta looked good overall, but that might end up not being the best choice.
Why not always have a short call leg?
The premiums on them are quite low, especially if you consider transaction costs. I played with different scenarios, and selling short calls always added too little theta for the delta it was taking away. Selling a further OTM call starts to become interesting if the index rises, but at that point it might simply be better to close the trade and lock the profits.
If you have any thoughts, I like to hear them!
The piece worth naming explicitly is that this is not really a directional trade, it is a bet on the front of the vol curve against the back. Your long 180 day straddle is long vega and long gamma, your weekly puts are short vega and short gamma, and because the weeklies decay faster you net positive theta only while front realized vol stays under what the weeklies are pricing. The day realized vol on the index spikes, the short front gamma dominates the long back gamma and the position behaves nothing like the calm theta engine it looks like on a quiet week. So the real questions are not the 180 day horizon, they are what the term structure is doing (are you selling a richer front than you are buying in the back) and what your rule is when a week of realized vol blows past the weekly implied. That scenario is what defines the trade, not the slow drift.
Youre one short call away from having an Iron Condor. I like the strategy, but I would like to make sure you think about the 180 day out time horizon. You really need to find arguments for having an 180 day out and why not shorter or longer? What are the catalysts driving your thesis? If you are neutral and just want to collect theta, then like I mentioned, you’re 1 short call away from an condor.
Why not create a condor on a monthly or weekly basis? If the index breaches one wall, you manage it. It’s easier to asses on a monthly basis then on a 360 or 180day out basis. This is also a theta collecting strategy but you are also managing vega more efficiently imo.
A long IC has a negative theta at entry, and 0 delta. My trade is positive theta and delta an entry, meaning I profit if the index is stable or increasing. Mainly because of the mismatch between the long and short legs' dte. I really want to be detla and theta positive, as I want to bias my trades to benefit from index going up and from theta decay.
Also, the plain long IC has a positive gamma at entry, but my gamma is negative at entry and mostly stays negative if I manage to stay theta-positive. The reason I care about this is that a negative gamma has the effect of "selling the index as it goes up and buying as it goes down", so there's an element of buy the dip and sell the top baked into the trade.
Nice that makes sense.