No one seems to be posting much useful stuff in terms of option plays/structures/setups, so let me offer an example of an interesting option play on TWLO. Not a holy grail and I won't be trading it (although I test lost of stuff live so who knows), but it has potential and can be delta-hedged, or you could get out with small profit whenever the underlying moves. May also be fun to test with various vol levels:
Cool option plays
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Another one that is pure Vol play. You have small risk at low IV but should be able to get out with profit whenever vol spikes within a year (maybe before earnings?), unless you wait too long and let the vol shoot up too much.
(so kinda like owning VXX/UVXY but with minimal risk)
You could also play with delta to make it more directional.
This one may fall into the Holy Grail category, btw.
(so kinda like owning VXX/UVXY but with minimal risk)
You could also play with delta to make it more directional.
This one may fall into the Holy Grail category, btw.
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Hm...I have no idea of the delta of these strikes, but they look like being between 15 and 25...kinda.
And I can tell you that it is a very, very, very (did I mention very?) bad idea to sell these without protection ESPECIALLY on long terms.
Here's why:
https://myoptioncourse.com/option-vomma
Wingy (from 15 - 25deltas) options have the highest vega convexity, meaning whereas ATM options vega is linear. Imagine a stock with 5 vols. If you double the vol to 10, your ATM option will double in price.
Now think about the same stock, but this time take an option with like 0.01 deltas, a so called teeny. A teeny has almost zero vega, because it has zero optionality due to the fact that it is not within the return distribution.
But as soon as implied volatility increases, they become part of it. Their deltas increase and their vegas increase.
Imagine a stock with infinite volatility...that would make all options ATM, right? Now think about the transition of a teeny to an ATM option: It's delta, gamma will increase, but most important they will get some vega. And this process is not linear, it's convex.
Let's say a long OTM option has 3 vega, meaning for every vol point you gain 3$...but because an increase of implied volatility also increases the options vega...to now 5. So from now on you gain 5$ for every vol point increase. But if vol drops, you lose 3$ and the option has now only 2 vega and from now on you only lose 2$ for every drop in vol.
Vomma is also called Volga and more or less the abbreviation for VolGamma. I'm pretty sure everyone knows what gamma does to delta...well vomma does the same thing for vega.
Back to why it's batshit crazy to ever sell wings (<25delta) outright:
You gain: a little theta (non existent in these terms) and you are short vol, so you make a bit during a vol crush
Risk: gamma and short vomma
So basically you make less and less the lower vol goes, but you are getting your face crushed HARD once the underlying moves just a tiny but more: Your accumulate more and more deltas against you due to gamma AND you accumulate the more vega the higher implied vols go. You're basically short convexity in a big ass way.
I want to buy cheap wings when ever I can. Lots of them. Because wings are have so much vol convexity and ATM vega is linear, I can short ATM options all day without ever being at risk of blowing up. When you want to bet against convexity, it's your choice, buddy. I'm sure you'll be getting very good fills from MMs if you really wanted to be stupid enough to slap that monster on (but you aren't because now you understand vega convexity
)
EDIT: In case you wonder why I talk about OTM shorts when you actually are shorting ITMS: An ITM call = OTM put, so it has the same properties.
And I can tell you that it is a very, very, very (did I mention very?) bad idea to sell these without protection ESPECIALLY on long terms.
Here's why:
https://myoptioncourse.com/option-vomma
Wingy (from 15 - 25deltas) options have the highest vega convexity, meaning whereas ATM options vega is linear. Imagine a stock with 5 vols. If you double the vol to 10, your ATM option will double in price.
Now think about the same stock, but this time take an option with like 0.01 deltas, a so called teeny. A teeny has almost zero vega, because it has zero optionality due to the fact that it is not within the return distribution.
But as soon as implied volatility increases, they become part of it. Their deltas increase and their vegas increase.
Imagine a stock with infinite volatility...that would make all options ATM, right? Now think about the transition of a teeny to an ATM option: It's delta, gamma will increase, but most important they will get some vega. And this process is not linear, it's convex.
Let's say a long OTM option has 3 vega, meaning for every vol point you gain 3$...but because an increase of implied volatility also increases the options vega...to now 5. So from now on you gain 5$ for every vol point increase. But if vol drops, you lose 3$ and the option has now only 2 vega and from now on you only lose 2$ for every drop in vol.
Vomma is also called Volga and more or less the abbreviation for VolGamma. I'm pretty sure everyone knows what gamma does to delta...well vomma does the same thing for vega.
Back to why it's batshit crazy to ever sell wings (<25delta) outright:
You gain: a little theta (non existent in these terms) and you are short vol, so you make a bit during a vol crush
Risk: gamma and short vomma
So basically you make less and less the lower vol goes, but you are getting your face crushed HARD once the underlying moves just a tiny but more: Your accumulate more and more deltas against you due to gamma AND you accumulate the more vega the higher implied vols go. You're basically short convexity in a big ass way.
I want to buy cheap wings when ever I can. Lots of them. Because wings are have so much vol convexity and ATM vega is linear, I can short ATM options all day without ever being at risk of blowing up. When you want to bet against convexity, it's your choice, buddy. I'm sure you'll be getting very good fills from MMs if you really wanted to be stupid enough to slap that monster on (but you aren't because now you understand vega convexity
)EDIT: In case you wonder why I talk about OTM shorts when you actually are shorting ITMS: An ITM call = OTM put, so it has the same properties.
Hm...I have no idea of the delta of these strikes, but they look like being between 15 and 25...kinda.
And I can tell you that it is a very, very, very (did I mention very?) bad idea to sell these without protection ESPECIALLY on long terms.
Here's why:
https://myoptioncourse.com/option-vomma
Wingy (from 15 - 25deltas) options have the highest vega convexity, meaning whereas ATM options vega is linear. Imagine a stock with 5 vols. If you double the vol to 10, your ATM option will double in price.
Now think about the same stock, but this time take an option with like 0.01 deltas, a so called teeny. A teeny has almost zero vega, because it has zero optionality due to the fact that it is not within the return distribution.
But as soon as implied volatility increases, they become part of it. Their deltas increase and their vegas increase.
Imagine a stock with infinite volatility...that would make all options ATM, right? Now think about the transition of a teeny to an ATM option: It's delta, gamma will increase, but most important they will get some vega. And this process is not linear, it's convex.
Let's say a long OTM option has 3 vega, meaning for every vol point you gain 3$...but because an increase of implied volatility also increases the options vega...to now 5. So from now on you gain 5$ for every vol point increase. But if vol drops, you lose 3$ and the option has now only 2 vega and from now on you only lose 2$ for every drop in vol.
Vomma is also called Volga and more or less the abbreviation for VolGamma. I'm pretty sure everyone knows what gamma does to delta...well vomma does the same thing for vega.
Back to why it's batshit crazy to ever sell wings (<25delta) outright:
You gain: a little theta (non existent in these terms) and you are short vol, so you make a bit during a vol crush
Risk: gamma and short vomma
So basically you make less and less the lower vol goes, but you are getting your face crushed HARD once the underlying moves just a tiny but more: Your accumulate more and more deltas against you due to gamma AND you accumulate the more vega the higher implied vols go. You're basically short convexity in a big ass way.
I want to buy cheap wings when ever I can. Lots of them. Because wings are have so much vol convexity and ATM vega is linear, I can short ATM options all day without ever being at risk of blowing up. When you want to bet against convexity, it's your choice, buddy. I'm sure you'll be getting very good fills from MMs if you really wanted to be stupid enough to slap that monster on (but you aren't because now you understand vega convexity
EDIT: In case you wonder why I talk about OTM shorts when you actually are shorting ITMS: An ITM call = OTM put, so it has the same properties.
Thanks for the assessment!
You're absolutely right, and it's one of reasons why I may not trade the 1st setup above, but it could find a place among other setups that may have high Vega that increases with vol.
However, even on its own, aren't Greeks used to help you asses the option's risk and behavior, but you could do the same assessment by reviewing your setup's P&L graph visually? If so, then here is what happens when vol increases by 10%: you escape unscathed or even get out with small profit, even as Vega decreases to negative:
Now, if you wait too long and let the vol go to 100% during an extreme event, then indeed you could lose ~$5K, which still isn't bad on a $2K profit potential without an extreme event:
That's also the reason why I mentioned initially that this setup is interesting in terms of modeling it and playing with vol.
Other than that, 99% of my plays are long wings and loaded with Vega. Also my 2nd post above had a better example that's more (not fully) safe from the risks you've mentioned.
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Regarding my 2nd example above, here is what happens when IV increases by 10%, you're basically guaranteed to get out with profit:
Only when, again, you wait too long and let the IV shoot above 30%, then you could start losing on the way down, and are entering a danger zone:
I like this setup much more because first it makes solid profit when vol goes up, though indeed it could also lose a lot during catastrophic event (though probably not as much as people selling $0.10 puts).
With my main trades I usually shoot for tiny downside risk, but can't show those trades here, so I'm just posting stuff that's interesting in terms of vol, and hopefully not totally useless
Only when, again, you wait too long and let the IV shoot above 30%, then you could start losing on the way down, and are entering a danger zone:
I like this setup much more because first it makes solid profit when vol goes up, though indeed it could also lose a lot during catastrophic event (though probably not as much as people selling $0.10 puts).
With my main trades I usually shoot for tiny downside risk, but can't show those trades here, so I'm just posting stuff that's interesting in terms of vol, and hopefully not totally useless
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The biggest issue I have with this setup aside from short convexity is that it is very sensitive to skew dynamics, because you go out so far in terms. Theta/gamma is not an issue here, everything is vol. You lose to put skew and you're short kurtosis, too.
Second, as you can see from your graph: moves in implied vol changes your delta profile. At first sight, you get shorter the higher vega goes, so you're short vanna up to a certain point. I bet you have also not accounted for the massive skew deltas.
The problem with these simple analyzers is that they don't give you a complete picture. I would pull up a risk matrix that includes vanna and vomma, so you can asses how your position changes with skew at a certain price at least under sticky delta regime.
IMO the best play on vol level is still a vega neutral fly with more wings than body. It hedges out these nasty 2nd order greeks that you don't want to toy around with at this stage
Second, as you can see from your graph: moves in implied vol changes your delta profile. At first sight, you get shorter the higher vega goes, so you're short vanna up to a certain point. I bet you have also not accounted for the massive skew deltas.
The problem with these simple analyzers is that they don't give you a complete picture. I would pull up a risk matrix that includes vanna and vomma, so you can asses how your position changes with skew at a certain price at least under sticky delta regime.
IMO the best play on vol level is still a vega neutral fly with more wings than body. It hedges out these nasty 2nd order greeks that you don't want to toy around with at this stage
Yup, this sounds like standard MM-type setup, which I now use often, but always looking for additional edges and I may have some here and there. (not related to the examples I provided)
I haven't done the req, but that's like a $250K haircut under regT. No dynamic-stress, so you will lose on the downside and make a bit more on the upside.
Hmm, not sure because I have PM, while this trade is too complex for IB to show margin impact. But when scaled down to single options, the margin shows as negligible (even negative in my case because I have other positions that offset the risk):