GOOG - Yay or Nay

[riskarb]

Quote from Rearden Metal:

Can you explain how the 310/280 call backspread is structured?

What ratio, etc...? I'd like to run the numbers and compare.

Long^1 GOOG Aug 280C
Short^2 GOOG Aug 310C

You're buying a stock-proxy in the long calls, while selling the peak of the gamma-curve by selling the 310C. The gamma in the atm options do nothing but get cheaper as they slide down the curvature.

That trade is a 3-bagger at $295 with significant upside if we rally a bit from here. Best-case at expiration is a close at the short-strike.

 

[Rearden Metal]

I probably should have looked into that one. Like many, I tend to avoid deep ITM's because of the slippage. You seem to know a little about my background, but I should add that after ten years of trading equities, I only got into options half a year ago. So you're alot more experienced on this subject, and I'm listening...

 

[riskarb]

Quote from Rearden Metal:

I probably should have looked into that one. Like many, I tend to avoid deep ITM's because of the slippage. You seem to know a little about my background, but I should add that after ten years of trading equities, I only got into options half a year ago. So you're alot more experienced on this subject, and I'm listening...

Our mutual friend, JC from Jersey, is your biggest fan and fellow poker-junky. He used to talk about you quite a bit. That, and I remembered we share a similar political-view.

Read Natenberg and Baird. Try to sell atms and buy wing-strikes[natural butterflies] to keep the gamma[curvature] working for you. That's really all there is to it. The position-permutations come with time.

There is a lot of interest in GOOG front-month strikes out a couple sigmas. I didn't look at the market in the 280s today, but it was $.50-wide when I did the ratio.

 

[Rearden Metal]

Cool. The margin required on each 2-1 backspread in this case is over $10,000, right?

 

[riskarb]

Quote from Rearden Metal:

Cool. The margin required on each 2-1 backspread in this case is over $10,000, right?

The haircut:

Long call spread debit + variation req on 1 naked short call.

 

[Rearden Metal]

The more I think about it, the more I like your backspread better than my simple short deep OTM calls. It's well positioned for the anticipated IV drop. A 9% gap up like last time though, and you'd lose about $1,000 per backspread, if I'm figuring it correctly.

 

[riskarb]

You're short vol in either case, but with the backspread you can be paid many multiples of your debit. Payoff of nearly 7x with nearly equiv gammas.

Yeah, a $28 move in the stock results in a $1000 loss. But very favorable when accounting for r/r.

 

[Rearden Metal]

Quote from riskarb:

You're short vol in either case, but with the backspread you can be paid many multiples of your debit. Payoff of nearly 7x with nearly equiv gammas.

I'll be paying attention to how your position fares tommorow morning. Isn't saying "paid many multiples of your debit" a bit misleading though? Unlike a regular spread, your debit is not the total amount at risk, nor is it anywhere close to the margin required.

 

[riskarb]

Quote from Rearden Metal:

I'll be paying attention to how your position fares tommorow morning. Isn't saying "paid many multiples of your debit" a bit misleading though? Unlike a regular spread, your debit is not the total amount at risk, nor is it anywhere close to the margin required.

Right, obviously I am referring to using static pricing with the benefit of hindsight. The risk/reward was symmetrical at 2 sigmas +/-; which is the important criteria, IMO. But certainly it was risking a couple multiples of the debit of we were trading 10% higher.

 

[riskarb]

Quote from Rearden Metal:

I'll be paying attention to how your position fares tommorow morning. Isn't saying "paid many multiples of your debit" a bit misleading though? Unlike a regular spread, your debit is not the total amount at risk, nor is it anywhere close to the margin required.

The 280/310C short backspread is trading $11.00 to the buy.