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best ways to go long/short volatility...
- Thread starter cdcaveman
- Start date
Quote from cdcaveman:
You can't make money without risk..... that's obvious of course. But the wider you spread your wings and the farther out you go the more your neutralizing yourself... get a profit calculator
Like hoadley's or use ur brokers platform if it has on to play with the assumptions
I am not saying I'll make money without risk. Just wanted to follow the OP and see if flies are good way to go long/short volatility.
I do have Hoadley on Excel. Yet, I don't generally get a rush in playing assumptions, I am more focused on analyzing options past prices and try and understand.
By the way, I'd like to share this article about volarbs and how the play volatility!
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That's how flies actually work in the mkt, which should suggest to you that a fly isn't a particularly good way to express a long/short vol view.Quote from marameo:
That's my point!
Also, I'd like to point out that short volatility positions such as the short straddle, have the potential for large losses should the underlying price move sharply in either direction. So, to limit these potential losses I may like to cap the maximum downside risk which is the debt I pay to initiate the long butterfly.
I am more interested in daily mark-to-market value of the butterfly.
Now, what could drive my butterfly to zero?
(see I purchased the butterfly by the end of july for 21 points. 1 month later it was still trading at 21 despite the underlying move)
Quote from Martinghoul:
That's how flies actually work in the mkt, which should suggest to you that a fly isn't a particularly good way to express a long/short vol view.
Enlightened us..... its a replacement for straddles on a long short vol expression ... capping your risk by limiting your payoff.... tell us something other then "this isn't the best way". We need insight... I started this thread to get insight
Well, basically, when you buy a fly, you're "pinning" the strike. The market isn't gonna give you the money until the strike is well and truly pinned, i.e. vol completely collapses or you actually expire.Quote from cdcaveman:
Enlightened us..... its a replacement for straddles on a long short vol expression ... capping your risk by limiting your payoff.... tell us something other then "this isn't the best way". We need insight... I started this thread to get insight
That's just based on my personal experience, so take w/pinch of salt.
Quote from marameo:
I am sorry, what gains should I cap? Those generated by the underlying move? I don't want to capitalize on that, it is just not my goal!
However, I understand I should analyze more data, not just a month of options settlement prices.
Could anyone please explain to me in plain english why the following long atm dec12 butterfly purchased by the end of july for a 21-point debit, took that path?
I assume long butterfly = short volatility while I get rid of underlying directional risk.
Thanks
You can't practically speaking take on vol risk without taking on some gamma risk. Vol is really a fixed/floating swap where you buy or sell the fixed rate (implied vol) and receive/pay the floating rate (realized vol).
If yout think vol will go up then you expect the market to either realize more vol or agree with you. Why would you sell any options into that. Your potential pnl is unlimited.
With regards to butterflies and short vol, marti is right. It takes a lot more time to make money because of the pin to expiry. But my personal experience has been that protection from gap risk outweighs this issue.
If you are only looking for implied vol moves, you will probably be dissatisfied with your returns. Bid/offer and the requirement of more complex structures to get you gamma flat will require larger positions and the understanding of other risks (term structure, skew, etc).
Quote from newwurldmn:
You can't practically speaking take on vol risk without taking on some gamma risk. Vol is really a fixed/floating swap where you buy or sell the fixed rate (implied vol) and receive/pay the floating rate (realized vol).
If yout think vol will go up then you expect the market to either realize more vol or agree with you. Why would you sell any options into that. Your potential pnl is unlimited.
With regards to butterflies and short vol, marti is right. It takes a lot more time to make money because of the pin to expiry. But my personal experience has been that protection from gap risk outweighs this issue.
If you are only looking for implied vol moves, you will probably be dissatisfied with your returns. Bid/offer and the requirement of more complex structures to get you gamma flat will require larger positions and the understanding of other risks (term structure, skew, etc).
Time is relative... shorter wing spread faster you pump the vol out... no such thing as delta neutral or gamma flat
..Quote from newwurldmn:
You can't practically speaking take on vol risk without taking on some gamma risk. Vol is really a fixed/floating swap where you buy or sell the fixed rate (implied vol) and receive/pay the floating rate (realized vol).
If you are only looking for implied vol moves, you will probably be dissatisfied with your returns. Bid/offer and the requirement of more complex structures to get you gamma flat will require larger positions and the understanding of other risks (term structure, skew, etc).
Soon less complex being???
I agree that flies are a poor long vol trade. Why limit the outlier for what's often a asymmetric risk? A straddle and a fly converge as you add width to the strikes, so if you knock the fly it's also an argument against the straddle. Narrow flies are not a bet on anything but a pin.
Gamma trading an ATM option IS a straddle.
So what to trade for the upstairs guy who wants long vola and doesn't want to ratio into some moronic naked short wing calendar? (Why trade the ratio calendar/diag when it quickly flips modality on vega?)
I like 1:1 diags which solve for a minimal gain if DITM, but hit max payout at mid (between spot and strike). Nearly flat gamma and a few thetas.
Gamma trading an ATM option IS a straddle.
So what to trade for the upstairs guy who wants long vola and doesn't want to ratio into some moronic naked short wing calendar? (Why trade the ratio calendar/diag when it quickly flips modality on vega?)
I like 1:1 diags which solve for a minimal gain if DITM, but hit max payout at mid (between spot and strike). Nearly flat gamma and a few thetas.