Delta hedging questions

[Herkfsu]

the 310's have Vega of apx .17 at 15 vol..If you believe the market will trade at 10 vol,theoretically you should be able to capture 5 vol handles which would be 5 x .17=.85.
Im rounding up the vol to 10% on the 323 strike

Keep in mind you are selling gamma at very low levels and your total edge for each 1x4 spread is 0.85...

Thanks for the reply! All this is great info for me. I am really just trying to find the most efficient way to "sell insurance" as part of my portfolio. If I come across as trying to find the holy grail of option trades, I am not. I believe markets are extremely efficient, but with that comes reward for taking risk. So again, thanks for all advice.

In my example, the 1/17 310 puts each have a vega of .17. So wouldn't the "total edge" be 4x the 0.85 you put above?

And given vega changes, (typically falls) as vol drops, can you just multiply the difference in impled vs realized by the options vega? For example, if the 310s IV dropped to 10%, its price would not fall by (5 x .17).

 

[Trader13]

Let me just tell you that I have 800 of these ratio spreads on SPX right now ... while having to hedge continuously...

You're a heavy hitter! If my question does not intrude on your edge, do you hedge at discrete time intervals or based on market movement? I'm under the assumption that effective dynamic hedging in today's market requires an automated system. But if you're doing it manually, that's interesting.

 

[taowave]

You have 800 SPX 1 x4 put spreads on?? 4 percent wide??

Your own capital???

C'mon bro....

Let me just tell you that I have 800 of these ratio spreads on SPX right now. But at different strikes and expirations, carefully calculated and backtested over the years. I use them to do a bit of market making (buying and selling them at near $0), while having to hedge continuously and sometimes getting outside of my available margin, though I usually can get out of that with cheap hedges,
I have a bit of an edge here and cannot provide details but I’m surprised you continue coming up with examples without actually looking at historical data. Not even one peek at option chain for Feb 5-8 2018?
That’s when many accounts totally blew up doing exactly what you’re describing.
Why is it easier for you to provide more examples and try to trade something on a guess vs actually taking a quick look at what would happen to you on a bad day?

 

[destriero]

You have 800 SPX 1 x4 put spreads on?? 4 percent wide??

Your own capital???

C'mon bro....

Trenton or bust!

 

[taowave]

Yes,I ballparked the "theoretical edge"...Its not linear on a vol drop

Yes you are correct,i screwed up..Your apx edge should be the 5 vol handles x 4,assuming you continuously delta hedged and realized 10 vol..Good catch..

FYI,the trade you are bringing up was 60% of "our" business,except we didnt buy the long put..Sold futures as a hedge...It was great ...until it wasnt

Not sure 15 vol is where I would load up

Thanks for the reply! All this is great info for me. I am really just trying to find the most efficient way to "sell insurance" as part of my portfolio. If I come across as trying to find the holy grail of option trades, I am not. I believe markets are extremely efficient, but with that comes reward for taking risk. So again, thanks for all advice.

In my example, the 1/17 310 puts each have a vega of .17. So wouldn't the "total edge" be 4x the 0.85 you put above?

And given vega changes, (typically falls) as vol drops, can you just multiply the difference in impled vs realized by the options vega? For example, if the 310s IV dropped to 10%, its price would not fall by (5 x .17).

 

[guru]

You have 800 SPX 1 x4 put spreads on?? 4 percent wide??

Your own capital???

C'mon bro....

They're 1:2, not 1:4 (the OP initially mentioned 1:2). Mine are around 20%+ wide, OTM and I alternate between ratio spreads and back ratio spreads, hedging each other. I end up with various other combinations.

 

[Herkfsu]

Yes,I ballparked the "theoretical edge"...Its not linear on a vol drop

Yes you are correct,i screwed up..Your apx edge should be the 5 vol handles x 4,assuming you continuously delta hedged and realized 10 vol..Good catch..

FYI,the trade you are bringing up was 60% of "our" business,except we didnt buy the long put..Sold futures as a hedge...It was great ...until it wasnt

Not sure 15 vol is where I would load up

So institutions don't hit bids far OTM to take advantage of the IV skew because the gap risk is simply too high?

 

[guru]

Trenton or bust!

When I buy a 1:-2 ratio spread and then a -1:2 back ratio spread, I sometimes end up with 1:3:2 flies, so I trade the same setups you do, just by accident
(and mine are so far OTM it doesn't matter what they are)

 

[taowave]

20 percent wide 1 x 2??

Why so far OTM??

 

[taowave]

I can only speak for when I traded on desks. It was a while ago,and typically the order flow left us short vol up the wazoo.Not many smart guys pound the wings..Those that did went the way of the dinosaur...

It seems like a very tempting trade,but not at these levels..Short gamma in size down 4 percent??

So institutions don't hit bids far OTM to take advantage of the IV skew because the gap risk is simply too high?