I came across this article showing few diagonal combinations with very attractive risk profiles. I think these might be profitable strategies but I wanted to start a conversation about the best way to manage them. For example, if the market does not move for a long period, the strategy payoff would sink in the central hole and although the risk is very low I was wondering how one could limit that even further. This is the article: https://tradingmatex.com/diagonal-strategies/
Low risk trading
- Thread starter the learner
- Start date
The example there is on EuroStoxx options hence very liquid and typically ATM or OTM strikes. I can imagine that on MES/MNQ would get even better liquidity.
Classic mistake:
"As you can see from the table above the charts, the strategy is vega positive. In this case we have a vega of 83 which means that our strategy could gain or lose 83 EUR for each 1% volatility point change"
This is not the case.
1st you have to weight vega with root time as front month IV moves more than back month IV
2nd, you have calendar risk meaning if front month vol explodes and back month does nothing, you're also losing money
"As you can see from the table above the charts, the strategy is vega positive. In this case we have a vega of 83 which means that our strategy could gain or lose 83 EUR for each 1% volatility point change"
This is not the case.
1st you have to weight vega with root time as front month IV moves more than back month IV
2nd, you have calendar risk meaning if front month vol explodes and back month does nothing, you're also losing money
Eyeballing the plots, the estimated payoff over a reasonable +/- 12% range for the underlying over the next 1 month would have a max profit of 1250 and max loss of 200. But if volatility goes down a lot, the whole estimated payoff will go down as well.
If you are in low volatility it is unlikely that the volatility would drop much further so it could be an idea settings for such strategy.
Very good point on the weighted vega. But the strategy is short vega on the front month, so the weighted vega of the strategy would be lower than what shown there, which is better for the strategy anyway.
The best "low risk" trade you're likely to be able to play is "buying technical support". Traders need to know where that is and have the balls to (1) "pile in there", and (2) set a close stop just in case their play turns out to be wrong.
Rinse and repeat.
KISS, baby.
Rinse and repeat.
KISS, baby.
dude, this is a discussion about options. And your contribution has nothing to do with the topic.