Cool option plays

[trend2009]

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Let me just add that, although I love MrPuppet as being one of most knowledgeable here, people's intelligence bias and making assumptions often get in the way, so they're unable to discover unique edges. They just dismiss stuff outright because of things they know in the back of their mind, but they'd fire biased people/employees who make assumptions and don't use hard data to prove their point.

So here comes some hard data, I scaled and backtested the above trade during the huge market crash of March 2020, and this trade was beautifully profitable, despite warnings and negative assumptions about Vomma

View attachment 261697

Basically where some people may discover treasure, others will pass right through, assuming there is no gold where they see dirt
If you want to make an argument, provide hard proof and evidence, not assumptions and stuff you know from theory. And especially if you want to discover edges!

which software did you use to do option backrest?

 

[guru]

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which software did you use to do option backrest?

ThinkOrSwim, the ThinkBack feature.

 

[guru]

do you mean butterfly?

He may be on a different time zone, so let me answer that yes, butterfly.
Though he is an MM, so it wouldn't be a simple fly but a large structure made of tons of options that in totality may be shaped like a butterfly, while having relatively small qty of those extra wings for protection.

 

[Damanuelman]

Haha sick thread. I completely nerded and geeked out for a bit.

 

[guru]

So BTW, here is my live, almost riskless structure (at current or higher IV) on another one, $COIN, just waiting for something to happen, not caring whether it'll go up or down. It initially started as a semi-fly type setup and grew to dozens of different options, then after collecting $theta I got out of several positions and hedged into this shape. May need to think how best to collect more theta on this.

(I copied my positions at IB into ToS to for demo and to play with, though I have my own similar tools)

 

[Zwaen]

So here comes some hard data, I scaled and backtested the above trade during the huge market crash of March 2020

Fwiw, when i tested my option strategy (suitable more for long term investing) i tested both the march 2020 crash and the 2000 'crash' because the former had a high volatility spike and the latter not. This can have different effects on different legs. Maybe something to consider when testing strategies.

Ofcourse the next crash will behave in a way never seen before so there go our backtests

 

[MrMuppet]

Let me just add that, although I love MrPuppet as being one of most knowledgeable here, people's intelligence bias and making assumptions often get in the way, so they're unable to discover unique edges. They just dismiss stuff outright because of things they know in the back of their mind, but they'd fire biased people/employees who make assumptions and don't use hard data to prove their point.

So here comes some hard data, I scaled and backtested the above trade during the huge market crash of March 2020, and this trade was beautifully profitable, despite warnings and negative assumptions about Vomma

View attachment 261697

Basically where some people may discover treasure, others will pass right through, assuming there is no gold where they see dirt
If you want to make an argument, provide hard proof and evidence, not assumptions and stuff you know from theory. And especially if you want to discover edges!

Thanks for the condolences, buddy

I can see where you're coming from and I've been there, too. IMO it depends on your size, handling and view. Holding a structure like that for small size and trade it for pay off is probably not an issue. But it is way too unpredictable to size it up and trade it for vol. Crash or not doesn't matter...what do you do during a pure vol event? Especially when the stock goes up. Remember that GME was a boring lowish vol stock that suddenly woke up to be a monster. 300 vols, no worries. Your structure would have killed you.

As you know, with options there are plays that are always shit. Calendars that make you short gamma, short theta and short vol, buying OTM calls to speculate on a rising stock price into heavy call skew, short 1x10 ratio spreads...all shit. The edge should be ginormous to make it worth the risk.

What you see as an edge and I don't is the heavy put skew. Double the vols in those teenies and I might have a look, but even then.
I like the fact that you toy around, but using a backtest to simulate a tail event is nuts. Tails are tails because they should happen with an extremely low probability. They ARE overpriced against realized vol BECAUSE they factor in things that have not happened yet.

But what do I know...I've been burned more often than not for being cute. It could very well be that you get away 10-20 years with shorting tail vol. Perhaps you make a good amount with money with it. But there are bigger edges that are easier to exploit with bigger size...I'd rather trade these

 

[guru]

Ofcourse the next crash will behave in a way never seen before so there go our backtests

Holding a structure like that for small size and trade it for pay off is probably not an issue.

Yes, basically this is not a MM-type nearly riskless trade, but a trade with specific risk, that is simply less directional than stuff that most people trade. May be better than selling just cheap naked puts, calls or spreads; but also not the only trade that one should load up on, so risk can be spread across names, as well as across trade types (while also observing your total risk across full structure).

I wasn’t even sure that it’s tradable even for me, so I posted it only due to interesting way the vol behaves. An initial vol increase may increase its value, then on further vol spike the value starts decreasing.
This may not be an edge on its own, but you’d have to play with, learn and understand variety of concepts (including Vomma that was good point) to uncover some edges. Otherwise people only discuss and learn basic spreads and selling naked puts with higher risk and not mentally challenging to even think of edges.

 

[MrMuppet]

I mean it is basically a call ladder/fence (i.e. a call spread financed with a short put) that is hedged to neutral with stock. Usually that is used for directional plays long into a declining vol environment...but 30 - 60 days out.

You would buy back the decayed put option in order to get a free ride on the call spread.

This may not be an edge on its own, but you’d have to play with, learn and understand variety of concepts (including Vomma that was good point) to uncover some edges. Otherwise people only discuss and learn basic spreads and selling naked puts with higher risk and not mentally challenging to even think of edges.

IMO people would be doing much better if they looked at options as a relative value play between an implied return distribution and the future (unknown) actual return distribution.
This way greeks become far more intuitive.

Also they should start out watching straddle runs through time vs. stock moves, how much equal delta puts cost vs equal delta calls (e.g. 25d put vs 25d calls) as well as butterfly prices through time (e.g. the butterfly with 25d wings) to get a feeling for where value is and which strikes and terms are mispriced.

Too many just put on positions regardles of skew and vol dynamics and toy around with a backtester to see how their position behaves.

When you think a certain area of the vol space is mispriced THEN you think about how you can extract that value with a position that isn't too dependend on the underlying movement...not the other way around.

25deltas are too rich? Well find a way to sell them without giving up on convexity. Perhaps overhedge them with teenies that are expensive in vol terms but are ridiculously cheap in $?

Skew is too flat? Well good way to slap on a fly and hoard cheap wings.
Put skew too rich but you want to go long? Buy puts, hedge delta and watch those OTM puts slide up the put skew for ridiculous vol gains although overall vol level is getting nuked.

Meme stock exploding together with overall vol levels? Well instead of buying puts to profit from the crash perhaps it's better to sell OTM puts as losses due to convexity are already minimal at these vol levels and make more dosh from a vol collapse than you lose from delta...stuff like that.

 

[emulimu]

I mean it is basically a call ladder/fence (i.e. a call spread financed with a short put) that is hedged to neutral with stock. Usually that is used for directional plays long into a declining vol environment...but 30 - 60 days out.

You would buy back the decayed put option in order to get a free ride on the call spread.



IMO people would be doing much better if they looked at options as a relative value play between an implied return distribution and the future (unknown) actual return distribution.
This way greeks become far more intuitive.

Also they should start out watching straddle runs through time vs. stock moves, how much equal delta puts cost vs equal delta calls (e.g. 25d put vs 25d calls) as well as butterfly prices through time (e.g. the butterfly with 25d wings) to get a feeling for where value is and which strikes and terms are mispriced.

Too many just put on positions regardles of skew and vol dynamics and toy around with a backtester to see how their position behaves.

When you think a certain area of the vol space is mispriced THEN you think about how you can extract that value with a position that isn't too dependend on the underlying movement...not the other way around.

25deltas are too rich? Well find a way to sell them without giving up on convexity. Perhaps overhedge them with teenies that are expensive in vol terms but are ridiculously cheap in $?

Skew is too flat? Well good way to slap on a fly and hoard cheap wings.
Put skew too rich but you want to go long? Buy puts, hedge delta and watch those OTM puts slide up the put skew for ridiculous vol gains although overall vol level is getting nuked.

Meme stock exploding together with overall vol levels? Well instead of buying puts to profit from the crash perhaps it's better to sell OTM puts as losses due to convexity are already minimal at these vol levels and make more dosh from a vol collapse than you lose from delta...stuff like that.

Great stuff! What can you tell us just by looking at this IV chart showing few strikes and 3 month expirations of Tesla?