Of course it is totally possible that my modeling code has a bug and my results are complete garbage! At least I am tracking the actual daily options prices and vol for a back check of the model.
It's a shitty trade, but it's my shitty trade
- Thread starter morganpbrown
- Start date
Of course it is totally possible that my modeling code has a bug and my results are complete garbage! At least I am tracking the actual daily options prices and vol for a back check of the model.
I build my IV surface by cut and pasting option chain data into a spreadsheet. Very advanced technology.To simulate your case, I would have to manually tweak the data. I will try it.
Is it statistically “common” for the back month vol to fall so much in a vacuum, e.g., with the front month vol staying constant? I honestly have no sense of historical bounds on vol skew, since I don’t have historical options data
You are trying to get a feel for where / how the strategy may lose money.
You can get a better feel for this if you dissect your position into component parts
The Long Oct29 439 / Dec17 444 Call Diagonal dissects into
Oct29 Short 439-444 Call Vertical
Oct29 / Dec17 Long 444 Call Calendar
Assume Spot at 444 on expiry Oct29 and Dec17 Vols = 10%
... the original premium was $3.66 debit
... the Oct29 439 call expires with a loss of $5.00 ( $439 strike - $444 spot )
... the Dec17 444 call would be worth approx $6.44 ( Spot x Vol x Sqrt(Time) x 0.40 )
P/L = ($3.66) - ($5.00) + $6.44 = ($2.66) loss
You can do this type of analysis without any fancy models to appreciate the risks.
Doesn't matter whether you think Vols will be 10% or not ... it is really just highlighting that other than extreme market moves ... your biggest exposure is to Vega
Thanks very much for introducing me to this diagonal spread dissection methodology. I will try to gain an intuition for it.
You should be able to model the various scenarios, and evaluate impact of Vol Changes.
Impact of Dec17 Vols falling to say 10% ... should look something like
I've not heard of the "C = Spot x Vol x Sqrt(Time) x 0.40" rule-of-thumb equation, but it sure is convenient. I assume this is only for ATM calls?
Now I can see the pernicious effects of good old vague-a. Crystal clear.
If the vol of the long call moves by -0.02, from 0.16 to 0.14, the P&L of the trade is f*cked. That's about a 14% move in the VIX. Pretty commonplace.
Guess I will start looking for vega-neutral trades... or at least closer to vega-neutral.
Let me ask anyone who knows what the hell they're doing a simple question:
Are you primarily trading volatility or underlying price? Or something else/neither/both?
Are you primarily trading volatility or underlying price? Or something else/neither/both?