atticus' single-name delta book
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Thanks for the help atticus and cdcaveman. I think I understand now that gains to neutrality would be the pnl at 55 at exp which would be max profit of a fly, I am a little confused regarding flat vs skewed vol when modelling the gains to neutrality. Atticus's prev post says use flat but latest say not to use flat. Do you think it would matter whether it is flat iv or non flat iv assuming the skew is not too steep. I modeled buying a 50/55/60 fly w stock at $50 using 40 flat iv and then another using call iv of 40/38/36 for the strikes respectively. At expiration max pnl w stock at 55 is $308 vs $301 respectively.
Quote from atticus:
This is what this board has become. A stalker gloating about a two-tick loss in ES which was traded as a hedge against the NDX fly. This fucking clown sends daily PMs. I am up 2.50 marked on the NDX fly. I couldn't short the NQ as it dropped 800 at the bell.
got a yacht...fine
made some $$$ on some real estate moves...fine
32 ticks A DAY, EVERYDAY, hold on there Paul Bunyan!
By the way nobody gives a flying f&*k if this guy has a yacht or can
make it to Europe; the saddest part if the tall tale is true.
ET serious entertainment, carry on......
I know BSM assumes constant volatility but I re-model my positions daily using strike IVs at the close. I then compare the new numbers with the original to see where things are heading.
Could you please comment on this approach when you elaborate?
Meaning that you should model using a snapshot of the vols wherever the fly is currently marked. In single-name it's not going to be much of an issue as it would be in index. You would want to model a sticky delta assumption in the index, but that's not the issue here.
IOW, I am not suggesting using flat vols, for example, "20.2%" for the body and wings. Use the vol-marks on the last quote on the fly at mid.
In index you may need to actually raise the vols across the strip even assuming a slight rally in the index due to Derman. Too much for this conversation.
The goal is to model the gains to the body to solve for a hedge ratio. I don't want to BS myself by dropping the vol-line or conversely by increasing it to make it more conservative and potentially reducing the hedge. GIGO. I make no attempts at vol-prediction when solving for the "half hedge".
The question (OTM fly hedge) is a good one as many would be hard-pressed to pull the trigger on the convexity hedge, let alone the delta1 trade. I went with "half the gains to body" since many would consider it a binary decision to hedge at all rather than a discrete hedging scenario that close to the body.
I like to use the arithmetic approx. even if I am hedging too heavy and it forces me to solve for gains to neutrality. *Of course I calc the fly-delta in R/T and often will solve for a hedge which averages the delta pos and the "half hedge".
Sorry if this is hard to read but I've been up most of the night trading exotics.
Thanks atticus. Regarding the averaging of the fly delta vs. half the gain hedge, does this mean that if pos delta of fly is +20 and the 50/55/60 fly has gain to neutral of $200 and it is now trading at 54, you would average 20 and 100 yielding 60 short shares as a hedge ratio? I noticed that in cases where the IV of the stock goes down or skw changes (after earnings for example) all the deltas drift towards 100 or 0 depending on moneyness of legs so what used to be a 10 delta fly becomes a 20 delta fly since the 50 strike delta goes towards 100 and the short 55 goes toward zero. If that should happen you are now looking at a fly that is more pos delta which means you can short more stock. Is that why you average the fly delta w the half the gain-to insulate against these IV drops?
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