Hedging the wheel

Don’t get too heavy on him. He’s only following the terms of his IB agreement where it says he needs to make average people feel that trading is something better left to the professionals. ;)
 
destriero said:
Sure, and that can be replicate in vol with a BWB. Generically I suggested 20D but I'd probably go with the 30/40 strikes. TQQQ touches 30 and you buy the 20-put which results in the 20/30/40 synthetic fly at little to no cost. Shares <25 out to Nov and I think you're safe in carrying the synthetic straddle with no upside prot, but you're only paying 18 cents for that call. When structured at 30-body? I would go long 100 TQQQ, short 2 Nov 30C and buy the 20/40 wings on a touch of $30 on shares.

Spot and vol are correlated. Meaning that as the market rises, vols drop. The vol-line generally refers to the vol at a specific strike and usually the prevailing ATM vol. Fixed delta vols will rise (sticky D) but global vols (strips) will drop. The skew is seen a predictor of forward vol, vertically (by strike in a tenor). Right now it's trivial edge (skew flat). IOW this environment is a boon for buy-writers.

Nov 30 combo is 8.48
Nov 25 combo is 7.40

So you're getting paid an additional 1.08 to carry those long deltas.

Synthetic combo (straddle) is trading 8.15 mkt ((strike - spot) + 2(30C prem)), but that's at the bid on the calls, not mid. The synthetic is trading near the Nov natural straddle.

So, you're not going to achieve a natural fly conversion at a credit on the 10-wide as the credit on the combo is 8.48, but you could run the 5-wide fly at a decent credit once you trigger the strangle buy on a touch of $30... or simply cover at a gain. The variables are time remaining, 30-strike vols, etc. I would estimate a 80% hit rate or better (gains to position on a strike touch).

View attachment 295328
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Thanks Dest for your thorough response. I appreciate. If you are willing to answer a few follow-up questions...

destriero said:
Spot and vol are correlated. Meaning that as the market rises, vols drop. The vol-line generally refers to the vol at a specific strike and usually the prevailing ATM vol. Fixed delta vols will rise (sticky D) but global vols (strips) will drop. The skew is seen a predictor of forward vol, vertically (by strike in a tenor). Right now it's trivial edge (skew flat).
More...

By sticky delta, I think you are describing this:

https://www.math.columbia.edu/~smirnov/Derman.pdf

But what are global implied volatilities (strips)? The slides seems to describe the change in ATM IV with respect to change in the price of the underlying as following either a sticky-strike, sticky delta, or sticky-tree implied tree model dependent on market conditions (complacent / greed, fear, or correction).

Also, you mention that the skew is flat, but this looks like strong negative skew (Nov 2022 expiration):

upload_2022-9-17_23-26-57.png


I must be missing something. How does this chart predict forward (which I assume means future) volatility? Under the sticky strike model, ATM IV drops as underlying rises in price. Under sticky delta model, ATM IV stays the same as underlying increases in price, IV of strikes close to ATM (local?) rise.
 
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markthepadrone said:
it really depends on what’s happening. I have rolled but really didn’t see an advantage to it. If the strike is way ITM, then the premium is probably higher than what I sold it for. Really no advantage to rolling.
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I usually roll before the the strike is deep ITM if I don't want to take assignment (short put) or be called away (covered call).
Roll as soon as price reaches your short strike.
 
ET180 said:
Thanks Dest for your thorough response. I appreciate. If you are willing to answer a few follow-up questions...



By sticky delta, I think you are describing this:

https://www.math.columbia.edu/~smirnov/Derman.pdf

But what are global implied volatilities (strips)? The slides seems to describe the change in ATM IV with respect to change in the price of the underlying as following either a sticky-strike, sticky delta, or sticky-tree implied tree model dependent on market conditions (complacent / greed, fear, or correction).

Also, you mention that the skew is flat, but this looks like strong negative skew (Nov 2022 expiration):

View attachment 295371

I must be missing something. How does this chart predict forward (which I assume means future) volatility? Under the sticky strike model, ATM IV drops as underlying rises in price. Under sticky delta model, ATM IV stays the same as underlying increases in price, IV of strikes close to ATM (local?) rise.
More...


I use a normed RR model across all tenors. There is an arb-condition when the figure reaches 1.8 and we're currently running 1.3 which is bottom three deciles on index skew. Above 2.0 there is an arb-condition in a complex combo. 1.x does not related to pwing/cwing vols. I can't elaborate as I am running a seminar and it's the highlight.

Strips colloquially as VIX, varswap. (-)spot/vol correlation. Above say 25 sticky strike dominates; below, sticky delta.
 
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