Hedging the wheel

You buy the wings when the combo trades flat (straddle). The trade is simply a synthetic short straddle. When the combo trade neutral the wings are at their nadir as well so you’re opportunistically up on both. The opportunity is buying the wings at neutrality and likely on a drop in vol (spot/vol corr). If your forward look is a trend continuation on mkt and vol (spot/vol corr) then it makes sense to get flat via wings and double up.

There is no difference between the natural short straddle and the 1x2 spot x short calls. It’s implicit that you’re timing the long spot and legging in once you’ve got some unrealized gains on the shares. I had a buy on TSLA -> marked up on shares -> short upside calls to effect synthetic short straddle -> synthetic trades neutral delta -> buy wings neutral -> get long more stock, rinse, repeat.

This was a 60-70 vol-line on spot with upside skew. It wasn’t huge but it paid to be short upside calls. It was dumb to continue adding but I had something approaching $200K credit in the fly structure. Pinned it was stupid money. I got greedy and the spread paid out at worst case but it was still a big gainer.
 
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When TSLA has upside skew, doesn't it also have positive spot/vol correlation like meme stocks? When the stock goes up the short upside calls may lose on vol?
 
LM3886 said:
When TSLA has upside skew, doesn't it also have positive spot/vol correlation like meme stocks? When the stock goes up the short upside calls may lose on vol?
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No, it was too crowded/owned for that. The skew modality flips on moneyness. Spot/vol corr and modality impacts the strikes as they trade under the mkt. It's not a huge impact, tho. It's mostly spot/vol-corr.

Meme stock vols implode as momo slows as the paper is two way. When it dot shots there is no liquidity. GME rallying $30 on a couple 1K share prints. There is no limit to vol in those situations.
 
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Makes sense. Thanks! I haven't been watching for very long, but sometime I notice TSLA has a slight positive spol/vol correlation during the day when it gaps up. Maybe it should still be categorized as sticky delta if the intraday noise is ignored.
 
destriero said:
You buy the wings when the combo trades flat (straddle). The trade is simply a synthetic short straddle. When the combo trade neutral the wings are at their nadir as well so you’re opportunistically up on both. The opportunity is buying the wings at neutrality and likely on a drop in vol (spot/vol corr). If your forward look is a trend continuation on mkt and vol (spot/vol corr) then it makes sense to get flat via wings and double up.

There is no difference between the natural short straddle and the 1x2 spot x short calls. It’s implicit that you’re timing the long spot and legging in once you’ve got some unrealized gains on the shares. I had a buy on TSLA -> marked up on shares -> short upside calls to effect synthetic short straddle -> synthetic trades neutral delta -> buy wings neutral -> get long more stock, rinse, repeat.

This was a 60-70 vol-line on spot with upside skew. It wasn’t huge but it paid to be short upside calls. It was dumb to continue adding but I had something approaching $200K credit in the fly structure. Pinned it was stupid money. I got greedy and the spread paid out at worst case but it was still a big gainer.
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Thanks @destriero, what I was missing earlier was that you added the short calls after you had a gain on the shares. I'm still confused about this: "This was a 60-70 vol-line on spot with upside skew." Earlier you mentioned: "The vol-line generally refers to the vol at a specific strike and usually the prevailing ATM vol." So that means that the ATM options for that expiration were pricing in a 60-70% move in the underlying? If so, then yeah, I can see why it made sense to sell the straddle. And then the upward skew would benefit your position under the sticky delta assumption (due to high vol) that the volatility of the upper strikes would drop as spot goes higher? Alternatively, if skew was flat or volatility was lower, you would not have converted to a synthetic short straddle and simply exited with the profit on the long shares.
 
ET180 said:
And then the upward skew would benefit your position under the sticky delta assumption (due to high vol) that the volatility of the upper strikes would drop as spot goes higher?
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IMHO, it is more likely a sticky strike regime as the vol is high. But that will imply even more benefit of selling upside vol with upside skew.
 
LM3886 said:
IMHO, it is more likely a sticky strike regime as the vol is high. But that will imply even more benefit of selling upside vol with upside skew.
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The issue here is that they are converging with skews so flat at present.
 
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