Delta Neutral not so neutral ?

Quote from riskarb:

dG IS priced under BSM, but absent dV.
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If you dont mind,I have a question for you and anyone else regarding trading the skew in the S&P 500...

As we know the implied option vol has a positive slope as you move from 100% spot -90%-80% and so on.....Conversely,when you look at the strikes 100%-110%-120% of spot the option vol slopes down...

If and when i sell premium,I always sell it as a spread..just in case...

As an example,lets say I am looking to sell vol delta neutral and am deciding between the 103/106 percent of spot vs the 97/94 percent of spot.I am using ATM foward to base the spreads.

What is interesting is due to the slope of the skew,if you reverse engineer the value of both spreads and come up with a flat vol for which they trade at,the 103/106 spread trades at higher flat vol and you bring in more premium,and quite a bit on a percentage basis...

So my question is to the mathematically inclined.

If the respective spreads imply a 16% flat vol for the 103/106, a flat vol of 13% for the 97/94,and the historical vol of the index is 11%,do i not have a theoretical edge of 5 vol points if the market does indeed trade at 11 and I hedge and stay delta flat??

Am i not far better off selling the 103/106 spread and delta hedging or trading intermarket spreads against it???

I have always been curious about this
 
Quote from taowave:

If you dont mind,I have a question for you and anyone else regarding trading the skew in the S&P 500...

As we know the implied option vol has a positive slope as you move from 100% spot -90%-80% and so on.....Conversely,when you look at the strikes 100%-110%-120% of spot the option vol slopes down...

If and when i sell premium,I always sell it as a spread..just in case...

As an example,lets say I am looking to sell vol delta neutral and am deciding between the 103/106 percent of spot vs the 97/94 percent of spot.I am using ATM foward to base the spreads.

What is interesting is due to the slope of the skew,if you reverse engineer the value of both spreads and come up with a flat vol for which they trade at,the 103/106 spread trades at higher flat vol and you bring in more premium,and quite a bit on a percentage basis...

So my question is to the mathematically inclined.

If the respective spreads imply a 16% flat vol for the 103/106, a flat vol of 13% for the 97/94,and the historical vol of the index is 11%,do i not have a theoretical edge of 5 vol points if the market does indeed trade at 11 and I hedge and stay delta flat??

Am i not far better off selling the 103/106 spread and delta hedging or trading intermarket spreads against it???

I have always been curious about this
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I don't follow your "reverse engineered" flat-vol scenario. There would be no advantage to selling the 103/106 were the vol-surface flat. The larger premium would reflect the implied forward [rates - div].
 
Quote from xtrhvydty:

Here is an example of a long GOOG DN strangle, comparing theoretical to actual pricing. Comments/corrections welcome.

Regards
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very nice analysis. Where do you get the hv, iv and option price data or charts? How do you plot the strategy payoff? Which software do you use? Thanks.
 
Quote from riskarb:

I don't follow your "reverse engineered" flat-vol scenario. There would be no advantage to selling the 103/106 were the vol-surface flat. The larger premium would reflect the implied forward [rates - div].
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What I meant to say,is if you look at the 103/106 call spread,the 103 strike trades at a higher vol than the 106 strike...For argument sake,lets say the 103 trades at 15% and the 106 trades at a 11.5% vol..The spread itself may trade for 1.20.

When i say a flat vol,i wasnt very clear.I meant to say what single vol would produce a fair value for the spread of 1.20.
If we are selling 15% and buying 11.5%,you know that the "single vol" will be 16% or higher,while historical may be 12 or so..

I am aware of ATM foward pricing and Divs..Any thoughts?
 
Quote from yip1997:

Where do you get the hv, iv and option price data or charts? How do you plot the strategy payoff? Which software do you use? Thanks.
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http://www.prophet.net/quotes/options.jsp
delayed option prices

http://www.hoadley.net/options/options.htm
free software for option spread combo pricing

http://www.ivolatility.com/options.j?ticker=spx&R=1
option average IV, HV

http://www.interactivebrokers.com/en/main.php
Option Spread prices, vol skews, & RT greeks via IB option trader
 
Can anyone give an insight what will change vega? I observed a big change of vega from -400 to -360 in just several days.
 
Quote from yip1997:

Can anyone give an insight what will change vega? I observed a big change of vega from -400 to -360 in just several days.
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dvega(speed) decreases with a drop in volatility, and vega diminishes as expiration nears -- nearly linear to the rise in gamma.
 
Quote from riskarb:

dvega(speed) decreases with a drop in volatility, and vega diminishes as expiration nears -- nearly linear to the rise in gamma.
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Thanks. How will vega respond to change in stock price?
 
Quote from yip1997:

Can anyone give an insight what will change vega? I observed a big change of vega from -400 to -360 in just several days.
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the underlying asset moving away from the ATM option strike ad the less days till expiration the lower the vega
 
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