Greeks on Backspread are puzzling me - Please Help

N

northstars

Maybe someone could help explain this to me: In both situations below a diagonolized backspread is set up. Then a few days later, the underlying price goes down, and volatility goes up. In the first situation, a significant profit is earned, in the second a small loss is earned. However, seemingly the delta, vega etc are the same in both positions. Are my figures wrong? Please advise and thanking you in advance for any help.

On 5/27:

SPY = 110

A diagonolized backspread could be set up.

Sell 1 July 106 call.
($6.9)
IV= 26
Delta = 69

Buy 2 Aug 113 calls
($3.56) x2
IV= 22
Delta = 48 x2

Thus the position would be set up for a debit of $.22. The delta of the position is 27.

On 6/1 SPY is 107.
The July 106 is now $5.16
IV = 29

The Aug 113 is ($3.3)
IV= 24

The position is now worth (1.44). Thus a profit of $1.22 would be made.

HOWEVER

Two days later, the trade seems to set up again - with much different results.

On 6/3 SPY is 110

July 106 is $6.6
IV = 26
Delta =69

Aug 113 is $3.46
IV = 22
Delta = 48

Thus the trade would be set up for a debit of $.32. The net delta of the position would be 27.

On 6/4 SPY is 106

July 106 is $4.55

Aug 113 is $2.4

Thus the position is now worth $.25 or a loss from 6/1 of $.07.

WHY The difference in results?
 
The first time, your short Jul 106c made $1.74 while your long 2x Aug 113c lost $ 0.52 for your net gain of $1.22

The second time, your short Jul 106c makes $2.05 while your long 2x Aug 113c loses $ 2.12 for your posted loss of $0.07

The only reason that could account for that would be that the 2nd time, the Aug 113c IV didn't expand as much as it did the first time and the loss of call premium hit the 2x long Aug 113c's of the 2nd trade harder.

You didn't post the IV's for the 4th date. Check them and I imagine their numbers will support this.
 
Your vega. Your diagonalized spread can actually be broken down into a backspread and two calendar spreads. Both these have positive vega so its a double whammy. You have a positive vega, you're making your money on expanding IV. like the previous response. the IV is what got you.
 
Thanks for responding to my post.

That was essentially my problem - it seems like the movement of the volatility and underlying were very similar to have such different results. I had day 4 IV values of 25 for the august 113 and 29 for the july 106.

So in the first example the underlying went down 3 pts and volatility went up 2 pts, and a profit was made.

In the second example, the underlying went down 4 pts and volatility went up 3 pts, and a loss was made.

Its possible that my data is inaccurate. I realize the position would be negative delta and thus hurt by downward movement and vega positive and thus benefited from lower vol - it seems that the results are inconsistent.

Im thinking either the data is inaccurate or, because of the negative delta the position has a sloping profit curve and the extra point down is where it crosses the BEP.
 
Quote from northstars:

That was essentially my problem - it seems like the movement of the volatility and underlying were very similar to have such different results. I had day 4 IV values of 25 for the august 113 and 29 for the july 106.

The volatility changes were not similar. Your Aug 113 IV's have got to be different.


So in the first example the underlying went down 3 pts and volatility went up 2 pts, and a profit was made.

In the second example, the underlying went down 4 pts and volatility went up 3 pts, and a loss was made.

Its possible that my data is inaccurate. I realize the position would be negative delta and thus hurt by downward movement and vega positive and thus benefited from lower vol - it seems that the results are inconsistent.

Im thinking either the data is inaccurate or, because of the negative delta the position has a sloping profit curve and the extra point down is where it crosses the BEP.

Correct, your data is inaccurate. That's why the results seem inconsistent. Get something that calculates IV correctly and take it out to 3 dec pts. Or possibily, double check your calcs (user error).
More...
 
Quote from northstars:

Thanks for responding to my post.

That was essentially my problem - it seems like the movement of the volatility and underlying were very similar to have such different results. I had day 4 IV values of 25 for the august 113 and 29 for the july 106.

So in the first example the underlying went down 3 pts and volatility went up 2 pts, and a profit was made.

In the second example, the underlying went down 4 pts and volatility went up 3 pts, and a loss was made.

Its possible that my data is inaccurate. I realize the position would be negative delta and thus hurt by downward movement and vega positive and thus benefited from lower vol - it seems that the results are inconsistent.

Im thinking either the data is inaccurate or, because of the negative delta the position has a sloping profit curve and the extra point down is where it crosses the BEP.
More...

You would benefit from higher, not lower volatility.
 
sorry, let me explain that better. You would want to put the trade on in LOW volatility, you would benefit if volatility went UP.
 
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