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The other big issue to remember here is that if you are trading butterflies/condors in skewed markets, you must account for the skew in both pricing and hedging. Butterflies/condors present as double risk-reversals and are therefore quite sensitive to skew.

You are basically just buying a straddle (at a slight discount) and capping your upside potential. A straddle will lose 2 times out of 3 (assuming normality), but win big on the 3rd time, evening out the expectation to 0 (assuming fair value). So I disagree with your premise that this is a...

Think of it this way. Define the crash from a perspective of volatility instead of price level. What do you think VIX would do in a crash? 70? 80? 120? During the Oct '87 crash the VIX (or VXO I believe) hit near 150. Take simple Black-Scholes, and using the excel solver you can solve...

What makes you think buying the straddle and selling a far OTM strangle is a high probability trade? Just curious.

If you are calculating the "fair value" off of flat-vol, the problem is that you are not taking the skew into account. Fair value (skew) = Fair value (flat-vol) + vega (strike in middle of spread) * slope of skew

In my opinion it's not a bad method of strike selection for an ATM fly. I'll often do the same in my initial analysis of a potential position. But it always ultimately comes down to getting more granular and evaluating my greeks over various scenarios before I decide what to execute in the market.

Yes, using Black-Scholes (flat-vol), it will come out to around ~3500% or so on average. You have to account for the skew as well which should add more to the return.

The back-of-the-envelope way to do this is to make a couple of simple assumptions. Define the "crash" -- say, 50%. Define the tenor -- say, over 6 months. Next, think about what vol would carry you there over that time. Probably around 75-80%, which I believe is in-line with where VIX topped...

Good stuff. So the way I do it right now is "on the clock." My pricing spreadsheet uses minutes to expiration. I'll usually reprice hourly or as needed. The main question I have concerns weekends. The way I do it now is starting on Thursday, I'll tweak my clock to begin removing an extra...

Sure that's fine. My point was that the VIX quoting convention is on a calendar year. To rescale to 252, you have to first "unwrap" the implied variance ( VIX^2 / 365 * 30).

Also, this naturally begs the follow up question(s) to "How to calculate daily implied volatility?" of.... Ok, we can calculate daily IV....but is this number even useful? If so, how would you use it? I think that there are a lot of academics out there that would say IV is essentially...

In most cases, it really doesn't make that much of a difference. But it is confusing. There was a point in time where I was very frustrated because I could never find a solid discussion of this topic in the literature. Seems most authors and practitioners pick one school of thought (either...

My 2 cents..... The basic Black-Scholes vol parameter input uses a 365-day year. So for pricing and hedging purposes, your implied vol parameter needs to be scaled to 365 days. Many traders will track realized vol using the 252-day convention, but if you want to use that number in the model...

No. It has to do with things like stochastic vol, discrete hedging, jumps, and demand for OTM puts etc. Lots of literature out there on it. For European index options, calls and puts are equivalent. There is no difference since they should both carry the same amount of time value in the...

I'd be a bit careful here. After all, think about the definition of what you're trading/comparing. If you buy the 12 month LEAP, you are expressing a long view on the volatility over the next twelve months. In contrast, the VIX future one year out represents the market's view of the current...

Wrong. He did answer the primary question. OP asked if settlement was at the open on Friday, to which rmorse confirmed. The remainder of this post is utter nonsense. I don't know rmorse personally, but I find his responses to be concise, relevant, and helpful. It is abundantly clear that he...

It's nonsense to claim that "stat arb" means "pairs trading." Pick a market. You estimate vol to be 20% sampled close-close. You estimate vol to be 10% sampled hourly. Based on your stats (estimates), there is an arbitrage. It's only as risk free as your stats are flawless and a given...

No. Just pointing out that using longer dated options is not somehow safer because your theta burn rate is lower. Theta is a derivative calculated from a model that's wrong, so I wouldn't get too caught up in it. It's a theoretical sieve used to bleed premium offsetting continuous dynamic...

Stepandfetchit- Time value = cost of gamma. Gamma is a squared term scaling linearly in time. That is, the gamma/theta ratio will be constant over the life of the option. This means the risks are the same for the 40 DTE option as a weekly, assuming both were traded at fair value. I'm...

If the position is significantly underwater, I didn't hedge correctly in the first place -- i.e. I was carrying too much short vega risk at the onset of the trade and I hedged at the wrong vol so my delta calculation was way off. As soon as you're way underwater, the mistake has already...