Delta hedging on teenies

i agree with the post that this is not a teenie option. your siri scenarion represents hedging a call in a $3 stock.
i would look at the .2 option with a 3$ strike and underlying of 3.15 as being in the money.

a move in vol from 35 to 50 in a $3 stock is nothing.

bottom line, if you are buying bc you like the volatility, you hedge.

now hedging a a 5$ call in a $3 stock is a different issue. its value is probably .05 or a true teenie. this option will generate lots of gamma for scalping. but you can over trade and create losses selling into a rally to 5$
 
cdcaveman and kapw7, sorry for not getting back sooner.

I'm posting this as a reply to our previous conversation, and also for luisHK who wrote in another thread about investing in Long vol during this low vol period.

Here is an idea that I explored once, albeit in my very unsophisticated manner (no quantification of slope, vol of vol, etc;! ) Just copy-pasting from my notes:

Long SPY Put at -7%, Short VIX Call spread at around k1=20 / k2=25, when established during periods of low vol (VIX < 20) seems to work rather well. What it does is serve as a way to purchase an SPY Put at a discount or even for a small credit. It's basically a disaster-protection hedge and/or more-fat-tails-than-expected profit-making strategy.

(Initially, I look at the -0.25 delta Puts, but somehow ended up settling on the more crude -7% strike, don't remember why...)

Details : We establish the spread at least 6 weeks before expiry. In the past few years (SPY ~ 120 to 140), typically, the SPY Put at -7% (when VIX < 20) costs $130 (and even as low as half of that). The VIX 20/25 Call spread costs the same => max loss = -500 + 65 = -$435. The profit when SPY does fall around 7% or more is humongous. Debit of $65 vs. profit of $440 to $1000.

Given that vol is mean-reverting, you can probably get away with realizing the gains on the Put and leaving the Call spread open to expire below 20! :-)
 
Quote from TigerBalm:

cdcaveman and kapw7, sorry for not getting back sooner.

I'm posting this as a reply to our previous conversation, and also for luisHK who wrote in another thread about investing in Long vol during this low vol period.

Here is an idea that I explored once, albeit in my very unsophisticated manner (no quantification of slope, vol of vol, etc;! ) Just copy-pasting from my notes:

Long SPY Put at -7%, Short VIX Call spread at around k1=20 / k2=25, when established during periods of low vol (VIX < 20) seems to work rather well. What it does is serve as a way to purchase an SPY Put at a discount or even for a small credit. It's basically a disaster-protection hedge and/or more-fat-tails-than-expected profit-making strategy.

(Initially, I look at the -0.25 delta Puts, but somehow ended up settling on the more crude -7% strike, don't remember why...)

Details : We establish the spread at least 6 weeks before expiry. In the past few years (SPY ~ 120 to 140), typically, the SPY Put at -7% (when VIX < 20) costs $130 (and even as low as half of that). The VIX 20/25 Call spread costs the same => max loss = -500 + 65 = -$435. The profit when SPY does fall around 7% or more is humongous. Debit of $65 vs. profit of $440 to $1000.

Given that vol is mean-reverting, you can probably get away with realizing the gains on the Put and leaving the Call spread open to expire below 20! :-)
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interesting.. the first thought i had a bout this idea is liquidity.. your putting it on low vix environment when liquidity is most likely very high compared to when the environment goes to a rising vix.. .. this is relative to the put.. not the call spread.. as the call spread is just a way to pay for the put..... and you are costing the call spread as a complete blow out at 500 bucks minus the credit..
so in a more abstract sense you are putting a cap on the cost of buying back your short vol in the vix and using the credit to help pay for your long gamma long vol play in the put..

skew increases when vol increases, spot goes down and vix goes up.. your capped losses in the vix in ratio to the credit given to the long vol/gamma play in the put equate to a profit chart of a vega neutral put spread no? its a put ratio backpread in essense? at least similar...without the same strike risk.. because here the vix could theoretically go up expire and your put could as well.. using the entire vol complex seems like a good idea to me though..

i get what your talking about though.. i wonder what you used to come up with your model PNL in a sell off.. theoretically the put could make a ton of money in a moderate sell off due to gamma and the vix spread could pan out to... i think there would be way to model the vix options correlation with the futures and changes in the spy.. to get a reasonable assumption of what might happen to the two derivatives..

seems like your just trying to neutralize vol and play downside gamma..
 
Tigebalm, thanks for the idea. Anyone else has a comment on this trade ?

It looks interesting. How does it compare to a long put spread in term of capping gains ? Some downside is 1 extra leg with some costs associated, vix and spy options don't expire on the same date .

Tigerbalm, did you actually trade it ?

BTW since the debt ceiling talk were postponed at least a couple of months, I'm no longer keen on going long vol.
 
Quote from luisHK:

Tigebalm, thanks for the idea. Anyone else has a comment on this trade ?

It looks interesting. How does it compare to a long put spread in term of capping gains ? Some downside is 1 extra leg with some costs associated, vix and spy options don't expire on the same date .

Tigerbalm, did you actually trade it ?

BTW since the debt ceiling talk were postponed at least a couple of months, I'm no longer keen on going long vol.
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you should be buying vol when no one wants to..... long vol is the minority right now.. the point is to find buy protection when its cheap.. if you think you can gauge the next event.. spread across it with calenders ..

his position is keeping convexity at higher degrees.. selling the vix 20-25 call spread has a cap to it.. the puts in the spx don't .. so if we hit like 35 on the vix its with high probability your put has made a hell of alot more then your vix call spread lost.. but idk.. i haven't got a model to get tractability to it ...

your selling one degree of convexity in the vix with a cap.. to get long the higher level of convexity in the put.. if that makes sense.
 
Quote from luisHK:

How does it compare to a long put spread in term of capping gains ?

Tigerbalm, did you actually trade it ?
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luisHK, no I did not trade it yet, I only backtested it.
I tried hedging Calendars recently, like you were thinking of on the other thread, but found the non-linearity confusing (the fact that your options' IV responds non-linearly and that there are 2 months involved, etc;). I came up with this trade instead, focusing on simplicity.

cdcaveman, great comments, thank you! Yes, the aim is to be Long an un-capped naked SPY Put, while financing it with something (VIX futures options spread) whose loss is capped and which is mean-reverting.
 
Quote from cdcaveman:



his position is keeping convexity at higher degrees.. selling the vix 20-25 call spread has a cap to it.. the puts in the spx don't .. so if we hit like 35 on the vix its with high probability your put has made a hell of alot more then your vix call spread lost.. but idk.. i haven't got a model to get tractability to it ...
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It does definetely sound interesting. I follow ES seasonnality pretty closely and don't plan to go much short stocks or long vol for the next couple of months, but might check this set up later on.

In the meantime, all extra feedback is welcome
 
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