Help! How can I outperform a directional view upwards?

D

dennisss11

Hi all,

Let's say I've found a pattern on a major index, where on Monday morning I know the stock is going to rise during the same week.

This would lead me to utilising a directional option strategy which allows me to profit from this upward trend. However, it would only be worthwhile to me if I can make more money than the actual amount that the index is growing. Now ofcourse I could move forward with buying calls, but then the rise of the index first has to outperform the premium I paid. So it feels better to be selling either puts or calls in some strategy.

A few remarks:
- I use index options, which are European style (so can only be exercised at expiration)
- It would be OK to use some leverage (lets say 1,4 max), but then there has to be some saveguard where I can get out of the positions without to much damage.
- The pattern is dependent on VIX levels for entry and exit - I just need the right strategy for when everything stays as I like during the week.

Can someone help me out, or point me in the right direction?
 
Knee-jerk response -- {without much thought}: Seems you are trading SPX. The most obvious choice, seems to be simple Vertical spreads. Debit spreads if your directional change trumps adverse VIX changes, but expirations need to be short enough (but not shorter) to capture your move. Credit spreads may require more insight to VIX forecasts than you have to gain the leverage you seek. --
If you post recent potential entry/exit intervals, may be able to gain some insight for what would have made sense then! (Entry on date x @ time, exit on date y @ time)
 
Are you saying if you sell vol,you will only sell spreads??

What does your metrics look like??

Avg profit/LossMax,percent winners,Max profit etc etc..

Those metrics will dictate which way to go...

dennisss11 said:
Hi all,

Let's say I've found a pattern on a major index, where on Monday morning I know the stock is going to rise during the same week.

This would lead me to utilising a directional option strategy which allows me to profit from this upward trend. However, it would only be worthwhile to me if I can make more money than the actual amount that the index is growing. Now ofcourse I could move forward with buying calls, but then the rise of the index first has to outperform the premium I paid. So it feels better to be selling either puts or calls in some strategy.

A few remarks:
- I use index options, which are European style (so can only be exercised at expiration)
- It would be OK to use some leverage (lets say 1,4 max), but then there has to be some saveguard where I can get out of the positions without to much damage.
- The pattern is dependent on VIX levels for entry and exit - I just need the right strategy for when everything stays as I like during the week.

Can someone help me out, or point me in the right direction?
More...
 
stepandfetchit said:
Knee-jerk response -- {without much thought}: Seems you are trading SPX. The most obvious choice, seems to be simple Vertical spreads. Debit spreads if your directional change trumps adverse VIX changes, but expirations need to be short enough (but not shorter) to capture your move. Credit spreads may require more insight to VIX forecasts than you have to gain the leverage you seek. --
If you post recent potential entry/exit intervals, may be able to gain some insight for what would have made sense then! (Entry on date x @ time, exit on date y @ time)
More...


1) There is no difference between a credit and a debit spread. 2) if you're right about a (rally) then at least your bull strike will benefit from locality/inversion (skew from - to +). So in that case a vol-forecast probably matters less that the structure.
 
destriero said:
1) There is no difference between a credit and a debit spread. 2) if you're right about a (rally) then at least your bull strike will benefit from locality/inversion (skew from - to +). So in that case a vol-forecast probably matters less that the structure.
More...
If one only knows direction and timeframe, but not magnitude of a move, it is not clear to me how I could create alternative credit/debit spreads with same performance characteristics. Am I mistaken? Knowing only direction and timeframe, I would likely place one leg ATM, hence my "Knee-jerk response".
 
stepandfetchit said:
If one only knows direction and timeframe, but not magnitude of a move, it is not clear to me how I could create alternative credit/debit spreads with same performance characteristics. Am I mistaken? Knowing only direction and timeframe, I would likely place one leg ATM, hence my "Knee-jerk response".
More...


A bull call spread (debit) is the same as a bull put spread (credit). ATM is good. Strike vols will benefit from skew (on index) as the mkt rallies, but strips will fall. If you’re ATM with the bull leg you may win on vol-diff (long leg vol drops less than short leg). Unlikely to matter much. Delta position and gamma should be your primary concern.

The issue with ATM bull spreads over bear spreads is that the call is the revenue side of the risk reversal (ATM bull spreads cost more than bear spreads).

Think of it this way. A symmetric index risk reversal (bull put/bear call/both OTM) is traded as a credit. A symmetric index risk reversal as verticals is traded as a debit (natural cs > natural ps in premium-terms).

Single RR = short put/long call = credit received.
Vert RR = short ps/long cs = debit paid.
 
Once in the trade there are modalities to consider. The ATM bull spread trades at a higher cost, prem and vol-edge, than the bear spread. Bear verts are cheaper, but that comes at a cost of a vol-rise (VIX?) as the market falls impacting your gamma position when both legs trade ITM.

The epilogue is that the shape of the vol-smile, if an accurate representation of forward strike vols, makes them trade “equal” in value, but not premium.
 
You must log in or register to reply here.
Back
Top