Deep OTM Put Ratio Spread - Planning for market crash

Martinghoul · Aug 15, 2016

GLDTLTSPY said:
Yeah sorry buy 2 sell 1. Was thinking of doing an adjustment to Talebs strategy in dynamic hedging.

Also does anyone here think it would be good to do as an earnings strategy compared to other strategies (either Put or Call)?

Thanks guys

Have you actually looked at what sort of strikes you can get if you do this?

ironchef · Aug 15, 2016

Deuteronomy_24_7 said:
Because OP wants tail-risk protection without paying a net credit.

I see.

Let me see if I understand what you said: In a 1:1 bear put spread, OP receives a credit for the spread. OP profits if SPY goes down but profit is capped. If SPY goes up OP loses but the loss is also capped. OP adds a long put which is paid for by the credit. OP's profit on the down side is unlimited. If SPY rally, OP's loss is zero. If OP just goes long put his upside risk is just the premium paid. What OP does is exchanging initial long put cost with a different loss structure and risk profile?

Sig · Aug 15, 2016

GLDTLTSPY said:
Hi guys,

I was contemplating going long 1x2 Put Ratio Spread Very deep OTM on the LEAPS in the SPY to potentially capitalise on a vol explosion/rapid market crash and get the max gamma for the very OTM LEAP puts I bought.

I would structure it so the trade would be established for at best a breakeven credit.

Has anyone on ET tried anything familiar to this? If so what are the potential pitfalls of this strategy.

Thanks.

The problem with almost any deep OTM strategy is that the spreads and transaction cost become a significant percentage of your total entry cost. The options pricing would have to be way off to make up for that.

GLDTLTSPY · Aug 15, 2016

bid-ask spreads are reasonable

On the SPY:

Jan 18 180 Puts trade for 7.3 bid - 7.44 Ask
Jan 18 200 Puts trade for 11.94bid - 12.11 ask

For IBM:

Jan18 95 Puts trade for 2.16Bid - 2.47Ask
Jan18 70 Puts trade for 0.94 Bid-1.11 Ask

Plan would be to take profits on any downdraft/vol spike

Anyone had experience with a trade like this?

newwurldmn · Aug 16, 2016

I always found these trades to be tricky. You are balancing gamma risk against a change in skew or new atm vol risk. I had a tough time resolving that.

Deuteronomy_24_7 · Aug 16, 2016

ironchef said:
Let me see if I understand what you said: In a 1:1 bear put spread, OP receives a credit for the spread.

No, a debit -- he would be buying the spread. But he wants to put on backspreads at around zero cost. Have a look at http://www.optionsplaybook.com/option-strategies/put-backspread/ ...

Martinghoul · Aug 16, 2016

newwurldmn said:
I always found these trades to be tricky. You are balancing gamma risk against a change in skew or new atm vol risk. I had a tough time resolving that.

Same here... You have to be reasonably good at guessing the magnitude of the sh1tstorm. Even on a terminal basis, I've only seen vanishingly few cases where these trades are priced in a sufficiently attractive manner.

newwurldmn · Aug 16, 2016

Martinghoul said:
Same here... You have to be reasonably good at guessing the magnitude of the sh1tstorm. Even on a terminal basis, I've only seen vanishingly few cases where these trades are priced in a sufficiently attractive manner.

The terminal cases are the worst, because you have to REALLY right on the distribution to earn and it's easy to be REALLY wrong.

sle · Aug 16, 2016

You also get destroyed on mini-crashes and your theta really sucks as the wings decay way faster. If you do it in a vega space and theta-neutralish it might be a better variation (play that dVega/dSpot mostly), but the skew has to be attractive.

ironchef · Aug 16, 2016

Deuteronomy_24_7 said:
No, a debit -- he would be buying the spread. But he wants to put on backspreads at around zero cost. Have a look at http://www.optionsplaybook.com/option-strategies/put-backspread/ ...

I am confused.

GLDTLTSPY said:
Yeah sorry buy 2 sell 1. Was thinking of doing an adjustment to Talebs strategy in dynamic hedging.

Also does anyone here think it would be good to do as an earnings strategy compared to other strategies (either Put or Call)?

Thanks guys

If OP buys 2 puts and sells 1 = zero cost (all OTM puts), Would the 1:1 put spread be a net credit spread (sell a OTM put strike and buy a further out OTM put strike)so OP can use the credit to buy his other put?

Thanks.