Getting short Volatility
- Thread starter EliteTraderNYC
- Start date
Heres one way i heard to do it. short 1 put and 1 call front month, go long 1 put and 1 call 2 months out, front month tanks after event, then second month out stays the same. close the trade after the event.
That won't work. You're essentially putting on a put calendar spread and a call calendar spread. Both spreads have the same risk profile so the total risk is simply the sum of the 2 nearly identical risk profiles.
You're still counting on the underlying to not moving very far from when you entered (assuming it was placed ATM. If it moves too far in either direction you lose your net debit.
I don't think the second month options will stay the same. They probably won't drop as much or as quickly as the front month, but there would be no reason for them to maintain that higher vega anymore either.
rmorse
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That is a long calander. If the stock has a big move, you will lose money. And, it possible that trade might be long vega even though the front month will drop more that the back. If you get a moderate move and the back month comes in too much, you won't make money either.
To make money on these you have to have a stock price expectation.
To make money on these you have to have a stock price expectation.
I think you need one where the IV for the front month is like 120 and the IV for the next month is like 60. Then after earnings the IV for both is 50.
sell options, hedge delta with underlying
I don't think that would happen with American style options. Otherwise everybody would just buy that option instead of the front.
You can still lose money with these strategies. The only way not to have price risk is to have a lock with some kind of arbitrage opportunity, or to have a HFT frontrunning capability.
Yes. The world looks for those opportunities on the surface. You have to have a view or informational edge that would say one term will move less (in vol*vega terms) than another.