Figuring this out - Dual Vega Option Spread

C

cfelicio

Hi All,

I heard of this "strategy" from a friend, and after spending countless hours on TOS trying to "reproduce" it, I gave up and start thinking something is fishy...

Here are the details, they call it "The bric":

http://www.youtube.com/watch?v=3zJBU-DYUYs

It is a boring video from a guy bragging about his company most of the time, so I'd skip ahead to where he actually shows it on the TOS platform. Somehow it makes money if vol goes up or down, and he doesn't show where he'd lose money (as we all know, you must lose in some situation).

Here are the meaningful stats I got from the video:

Symbol Used: RUT

prob date 03/16/12

date 01/26/12

stock price: 795.64

buying power used 18000

volatility at 0
delta -5.44 neg
gamma -0.27 neg
theta 12.09 pos
vega -100.10 neg

P/L -3


volatility at -20

delta 0.8 pos
gamma -0.05 neg
theta 0.60 pos
vega -8.55 neg

P/L 1599.03




volatility at +50

delta 96.72 pos
gamma 0.48 pos
theta -203.46 neg
vega 487.79 pos

P/L Open 15136.30




volatility at +100

delta 132.52
gamma 0.31
theta -391.88
vega 548.23

P/L Open 41526.40


OBS: In no moment he simulates what happens if the stock price changes...


If anyone came across this, and know how to reproduce it, I'd be happy to find out more on the weaknesses of the strategy, and if it's actually even viable or not... :)

I will keep working more on it, and if I figure it out, will post the results / how to reproduce it!

Cheers!
 
Quote from cfelicio:

If anyone came across this, and know how to reproduce it, I'd be happy to find out more on the weaknesses of the strategy, and if it's actually even viable or not... :)
More...
It depends on what you are trying to achieve. There is a variety of ways you can get long Vega convexity (vomma, that is) for "free".

You can put it on via a term structure position (e.g. you get long an ATM calendar and sell an OTM calendar at higher vol) or a skew position (for example, a short vega 1xN spread where the outer leg is sufficiently cheap would be long vol of vol). Do you want me to post some examples?

The problem is that the skew-derived positions are very spot-dependent - the worst moves will take you from a long vega position to a short vega position. The term-structure derived positions are very dependent on the dynamics of the term structure - a parallel shift will indeed make you money both ways, but unfortunately the vol curve usually moves proportionally to the root-time.
 
Thanks for your reply, there's a lot of valuable info in it for me to research this further :)

Quote from sle:


You can put it on via a term structure position (e.g. you get long an ATM calendar and sell an OTM calendar at higher vol).
More...

I will try this one tomorrow on the TOS see how it looks! If you have any handy examples, I'll be happy if you can post them as well!


Cheers!
 
There was a thread here about a year ago on the BRIC. I always thought they were running Broken Wing Butterflies - BWB.
 
Quote from atticus:

Buy otm upside calls on index if you want vomma. Can we stop advertising for this SJO clown?
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I ended up finding / reading the old threads on this, and it was quite entertaining! lol

I guess I will just stick with my regular strategy, at least I know very well my risk / reward, and trade within my comfort zone.

Sorry for creating a new thread on this, I will use the search function better next time!

Cheers!
 
Quote from cfelicio:

I ended up finding / reading the old threads on this, and it was quite entertaining! lol

I guess I will just stick with my regular strategy, at least I know very well my risk / reward, and trade within my comfort zone.

Sorry for creating a new thread on this, I will use the search function better next time!

Cheers!
More...

Could you post the link to the BRIC-debunking thread, please?

Thanks.
 
cfelicio said:
I ended up finding / reading the old threads on this, and it was quite entertaining! lol

I guess I will just stick with my regular strategy, at least I know very well my risk / reward, and trade within my comfort zone.

Sorry for creating a new thread on this, I will use the search function better next time!

Cheers!
More...

I would like to also know the link of the thread. Could you post it please? Thank you!
 
sle said:
but unfortunately the vol curve usually moves proportionally to the root-time.
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Hi sle, I always appreciate your thoughtful responses in this forum. I have been trying to find resources to get a good handle on IV skew/Term Structure dynamics. Specifically how the IV surface changes especially as it relates to price change. I know it's not something that is consistent but there must be some rules of thumb that maybe happen in the market 80% of the time and that is good enough for me. In particular for example (same expiration) when the price goes up the new ATM will have the IV that was defined in the skew curve prior to the move (maybe a lower absolute IV value) but what happens to the whole curve? does it shift to the right? does it shift to the right and lower? does it stay static (this one makes no sense). Do you know of a good resource to look into this? In particular butterflies suffer (or benefit) from the shape of the curve during the lifetime of the trade and I want to better understand it.
 
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