Custom Spreads!

M

murphmack

Problem: Can you buy a spread such that:
- No Shorted Options
- Net debit of $1000
- Positive delta to follow trend of an up-market
- Positive vega such that profit from increased volatility will trump the losses from positive delta when market 'pops'
- Beat theta in the process?

Ultimately my outlook is long market until it stops, then long volatility. But make profits on both ends in the process

I don't know if this is a retarded spread or not.. But it seems to be doing okay.

1ct @ 3.48
2ct @ 3.07
6.14 + 3.48 = 9.62 net debit
http://img690.imageshack.us/f/spy2.png/

Does anyone have calculators or something that can do this optimally?

Am I overlooking something?

P.S. That screenshot is from a paper money acct obviously, but the pricing of the options doesn't lie.



Thoughts? Discuss?
 
Quote from murphmack:

Problem: Can you buy a spread such that:
- No Shorted Options
- Net debit of $1000
- Positive delta to follow trend of an up-market
- Positive vega such that profit from increased volatility will trump the losses from positive delta when market 'pops'
- Beat theta in the process?

Ultimately my outlook is long market until it stops, then long volatility. But make profits on both ends in the process

I don't know if this is a retarded spread or not.. But it seems to be doing okay.

1ct @ 3.48
2ct @ 3.07
6.14 + 3.48 = 9.62 net debit
http://img690.imageshack.us/f/spy2.png/

Does anyone have calculators or something that can do this optimally?

Am I overlooking something?

P.S. That screenshot is from a paper money acct obviously, but the pricing of the options doesn't lie.



Thoughts? Discuss?
More...

A spread always involves a short option, so no. Assuming it's a combo; you expect to earn on both sides? Or do you mean earn on both tails?
 
Quote from atticus:

A spread always involves a short option, so no. Assuming it's a combo; you expect to earn on both sides? Or do you mean earn on both tails?
More...

I thought a spread was a way of hedging different types of risk using a combination of options. But you know what I mean it's a matter of semantics.

I don't know what I expect.. But I'm looking at it like this: I am expecting market to continue rallying so I have positioned some positive delta, and then I am expecting the market to tank at some point so I have positioned alot of positive vega. The effect I want is the positive delta to be there to keep the position from going underwater, and then KABOOM JIZZTIME when volatility explodes run for profits.

Is this going to work?
 
Quote from murphmack:

I thought a spread was a way of hedging different types of risk using a combination of options. But you know what I mean it's a matter of semantics.

I don't know what I expect.. But I'm looking at it like this: I am expecting market to continue rallying so I have positioned some positive delta, and then I am expecting the market to tank at some point so I have positioned alot of positive vega. The effect I want is the positive delta to be there to keep the position from going underwater, and then KABOOM JIZZTIME when volatility explodes run for profits.

Is this going to work?
More...

Spreads = long and short
Combos = long and/or short, calls AND puts

You're short the 23 puts, so i am not following you. Anyway, here is the PNL what-if on the Monday after April 2011 exp:

2vxon7p.png



The risk-reversal is skewed 1050bps on the 111 puts over the 132 calls, so yes, you're long a lot of vol but at 25% on the puts. I would look to sell a straddle after the March puts go off. The 2x1 put straddle will convert the position into a double diagonal backspread.
 
As noted by others, it's a combo.

If I read it right, how do you buy those calls for a dollar less than your quote shows?

If you expect an up trending market, why waste money on puts now? Other than an overnight crash, you'll liely be able to buy these puts (or others) later for less because of subsequent time decay and higher UL price.

If the UL doesn't uptrend and reverse hard, you won't see an increase in IV and you'll be whittled down by time decay. If by chance IV should contract as well, you'll be hammered.

Short answer? For something like this to work out, a lot of factors have to line up close to perfectly (getting the up move before Apr exp, the tinely taking of call profits, a reversal, an IV expansion, etc.) and that's unusual in any market.

Making money on both ends is more often a wishful fantasy than a likely reality.
 
atticus,

2 questions.

From a glance at the quote chains at OX, the puts have a much higher IV than the calls. For a pre Apr expiration graph a combo like this, what do you use for the IV for that period?

If not a complicated explanation, how do you create a screen capture like that for posting? In MSFT paint? Thx
 
Quote from spindr0:

atticus,

2 questions.

From a glance at the quote chains at OX, the puts have a much higher IV than the calls. For a pre Apr expiration graph a combo like this, what do you use for the IV for that period?

If not a complicated explanation, how do you create a screen capture like that for posting? In MSFT paint? Thx
More...

The puts should be about 1000 on the risk-reversal based upon the duration and deltas in question. I have no reason to doubt TOS here.

TOS uses midpoint during trading hours, but AH the quotes can be way off as there is nothing but last trade to mark to. The quotes are not vetted, so I would have to go back into TOS and look at the synthetics to see if the marks accurate.

I use JING for screen grabs. It's $15 and does video grabs as well. I save the picture to desktop and then go to tinypic.com and host it there.

You can simply use MSFT paint. Do a prnt-scrn -> open paint -> copy -> save file -> goto tinypic.com -> locate file -> upload -> post tinypic output link
 
Quote from murphmack:

I thought a spread was a way of hedging different types of risk using a combination of options. But you know what I mean it's a matter of semantics.

I don't know what I expect.. But I'm looking at it like this: I am expecting market to continue rallying so I have positioned some positive delta, and then I am expecting the market to tank at some point so I have positioned alot of positive vega. The effect I want is the positive delta to be there to keep the position from going underwater, and then KABOOM JIZZTIME when volatility explodes run for profits.

Is this going to work?
More...
Who knows if it will work, because magnitude and duration are unknown. Nevertheless, you might take a look at put diagonals but with some number of additional long puts on the wings. You'll have to trade around this position, but there's no reason you can't short additional put verticals and buy additional put diagonals as the market pushes up. You'll have to adjust your long puts to keep vega at a desired risk level. In your scenario, when the market tanks, vega alone is unlikely to be sufficient to neutralize your losses from delta. You'll need those additional long puts not only for their vega but their delta/gamma as well.
 
1) The quote I posted was the same day that I entered the spread. You guys who were doing risk profiles did it a few days after I did... Thus calls were already onside pretty big.

2) It is just the APR Calls and the DEC Puts (the 200cts) that I'm looking at.. Those other 2 options were part of a calendar spread that I was also analyzing. You can ignore those two.

3) Despite the big ups and downs of the market in the last few days, SPY broke 52wk highs and comes crashing back down to 133 now, the combination has not had a losing day.

If volatility drops back down to 16 (on the vix) I'm guessing the combo will have it's first losing day.

Trade Price / Current Price / PNL
APR Calls 3.48 / 3.91 / +0.43
DEC Calls 3.07 / 3.39 / +0.32

Question remains.. Would it be wise to dump the combo here, or let it ride out, either it needs to break the 52wk highs again or keep exploding volatility

http://img638.imageshack.us/f/spychart2.png/
 
You must log in or register to reply here.
Back
Top