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Completely different risk profile. If you're short puts and the market goes down you suffer a double whammy on both your deltas and your vegas. If the market goes up, both factors work in your favor. If you're short calls and the market goes up, you lose on your deltas but the positive...

I didn't mean to imply there's only one reason people are buying puts. I'm just saying there's a big additional upside pressure on puts from that sector of the market that wants portfolio insurance. I completely agree that the way the skew curves can be though of as eliminating "easy free...

I think you're raising the question of the most sensible way to hedge, and wondering if the way it is commonly done - with OTM options - really makes more sense than doing it with DITM options. It's a worthwhile discussion, but for purposes of understanding the skew I think it's more...

Very good observation (about the mean-reverting nature of volatility). Another problem with the VIX futures is that there's nothing that ties them to the VIX index except at expiration - absolutely nothing. So you'll find that when the VIX goes to extremes and you want to fade it, the...

I'm glad you got it beep - thanks for taking the time and trouble to read carefully and work through it. I was beginning to think I'd gone a little too far without laying enough foundation. Perhaps it's not immediately obvious that if you're long 1100's and short 1300's, then as the futures...

My point is that this would work IF there was no skew, IF every strike traded at the same IV. Because of the potential for that play, the lower below-the-money strikes are much more valuable than the higher above-the-money strikes. Because the lower strikes are more valuable, they trade at a...

Never tried it that way. But it might work that way in an option contract with really tight penny spreads. Try it and let us know!

A conversion is when you buy puts and sell calls at the same strike (and buy the underlying). This is buying and selling two strikes far apart - completely different.

What exactly would you like to isolate? Vegas? Gammas? What is your expected scenario? One way to isolate volatility is with calendar spreads. For example, you can buy the back and sell the front at a ratio that leaves you theta neutral and approximately gamma neutral, but long vegas.

I promised in another thread to post what in my opinion is the number 1 most direct and precise factor driving the skew in S&P500 options. Here it is. If I could buy OTM puts and sell OTM calls at the same volatility, I would make money day in and day out, virtually risk-free, with a...

Careful Newguy - the art of maintaining an option position delta and premium neutral is a subject near and dear to my heart - one I lived by and died by for many years. If you get me going on it you may regret it! No, you can't achieve the kind of perfect neutrality you mentioned. But I...

I mentioned as an aside how we were trading T-bond options in 1984, and somebody asked me for a specific scenario. But please don't misunderstand - this was not meant to imply that this will work today for a retail trader without access to order flow - for someone buying the offer and selling...

No, if the bonds drop you make money too. This is in no way a directional play. If I get a chance over the weekend I'll work up a detailed example.

Well of COURSE the skew is related to supply and demand. That's ALL the skew is. It is a living, breathing indicator of the supply/demand for options at lower strikes vs. the supply/demand for options at higher strikes. Since the vast majority of options that trade at lower strikes are...

If the S&P is at 1200, you can hedge your stock portfolio by buying 1100 puts, or by selling 1300 calls. Either way, it will contribute to the SPX skew looking as it always does - with the 1100 strike trading at a higher IV than the 1300 strike. Of course, you can buy 1300 puts, and you can...

There are 45 days remaining until option expiration. Futures are at 104-16/32. I buy 100 of the 104 calls at a volatility of 8%. I sell enough 106 calls to be gamma neutral, selling them at a volatility of 8.3%. I figure out my total position delta, and make a trade in the underlying to...

In retrospect, it was indeed a license to print money. But at the time it was all so new that we all did it very tentatively - wondering what we were missing, waiting for the other shoe to drop. At the time there was no one with more experience than us who could tell us it was safe. How do...

Skews in general predate the '87 crash. I don't know what the index option skews looked like before then, but it's hard to believe that every strike traded at exactly the same IV. When I first stepped into the T-bond options pit in early 1984 there was sort of a skew - the ATM strike traded...

Imagine you work in a widget factory. Your co-worker Hal comes to you and says "You know that order for 100 widgets we're supposed to deliver in 2 days? I looked on the shelves and we only have 85." "Damn," you say, "we're short 15 widgets." That's the common use of the word "short" and if...

Here are the only candidates I can come up with: 1. The stock becomes unavailable to borrow and you get unceremoniously closed out of your short stock position. 2. There is some dividend coming up. 3. Your broker will hit you with a surprise borrowing charge that exceeds your profits...