Low risk trading

[the learner]

You can recreate this spread in FEZ in our Wheel online product.

If the strikes were about -1 call at 95.7% of euro stoxx and + 2 calls x 101.8% of the stock price that translates to about the 45/48 FEZ call backspread diagonal.

The $45 strike IV is 21.3% and has a 84 delta
$48 IV is 14.8% and 39 delta
The spread is short 6 delta.

In our Chain you can simulate the trade and get a payoff diagram. Since this has a calendar aspect, we value the terminal value as the Aug 20 date. At that point, the Sep 17 residual value of the calls are valued at their volatility and added to the terminal value of the expired Aug call giving the payoff below.

Detailing the value at the current stock price and the worst case for the spread at $48:

So the trade gets a credit of $110 and the trade break evens are $46.70 -1% and $49.1 +4.1% and max loss is stock at $48 or -$32.

We analyze the valuation from a few perspectives:

1. Distribution % based on historical stock price movements times the terminal value at the shorter expiration give a valuation about equal to the price.
2. Forecast % based on historical volatility and skew give a value of -12.3% against.

The trade benefits from a steep put-call skew, now in the 95th percentile.

The data API Monies endpoint shows the IV surface by delta and expiration.

The trade looks good from a payoff perspective, but the euro stoxx tends to stay within the range of stock price where the trade does not work, at least looking at the historical distribution.

Hi Matt,

Interesting analysis. Can you do the same for the last strategy of the article, i.e. the one they consider as bullish play? It would be interesting to see the conclusions.

 

[Katyannaria]

many people work this way, because the lower the risk, the safer you can conduct transactions, this is a very good option for work

 

[the learner]

many people work this way, because the lower the risk, the safer you can conduct transactions, this is a very good option for work

I personally haven't traded these strategies before mostly because I haven't read much material or seen examples beyond simple calendar spreads. And since I never liked the normal calendar spreads I have always focused my attention to simple strategies like vertical spreads. But good to know that the strategies in the article are quite popular. That somehow gives them more credit.

 

[the learner]

@Matt_ORATS I was wondering if you had the chance to run your analysis on the last strategy presented here: https://tradingmatex.com/diagonal-strategies/

The strategy is presented as bullish play but has a protection for at least a 12% drop in the underlying.
Given the Vega flips to negative after a 3/5% drop the authors suggest to close and reposition, likely at no (or minimal) loss.

It would be great to see how your software value such strategy and how it performed in backtest assuming also the exit rules that the authors suggest. Thank you.

 

[the learner]

Trying to replicate the bullish strategy discussed in the article. Here I am using micro ES future options.

The original strategy has a short put OTM on the first expiry which partly finances a bull call spread OTM on the second expiry. On top of this, a negative 0.5 Delta is added via futures. So in my case I use 1 short MES and double the quantities on the option legs.

Another change I made is adding a long put deep OTM to limit max risk on the downside.

The images attached show the strategy over a 10% and 30% range move for the underlying.

 

[Matt_ORATS]

@Matt_ORATS I was wondering if you had the chance to run your analysis on the last strategy presented here: https://tradingmatex.com/diagonal-strategies/

The strategy is presented as bullish play but has a protection for at least a 12% drop in the underlying.
Given the Vega flips to negative after a 3/5% drop the authors suggest to close and reposition, likely at no (or minimal) loss.

It would be great to see how your software value such strategy and how it performed in backtest assuming also the exit rules that the authors suggest. Thank you.

Here's our order analytics (beta).

We do not have the ability yet to show fractional underlying with the options strategy.

I used the FEZ in place of ESTX and converted the strikes and days to expiration based on current markets.

Our theoretical values for each of the options make for a trade spread price of about $0.15.

This strategy does not fit into a backtest structure. I suppose you could observe a delta neutral call spread and combine it with a short put. I will have to think about how to test this strategy.

 

[the learner]

Thank you Matt, when you say "we do not have the ability yet to show fractional underlying with the options strategy" what do you mean exactly?

Because for example I simply doubled the quantity of options so that I could work with one single micro future.
In their strategy they are using 5 micro Eurostoxx to get the 0.5 delta given 1 micro is 1/10th of the notional controlled by the options. But with micro ES given there is nothing smaller we canonly double the quantity of options and use 1 micro.

 

[the learner]

Love this strategy! The positive Vega has helped a lot compensating the slightly positive delta during this market drop.
Closed everything and will reposition at lower strikes and next expiry.
I believe this strategy has a nice hedged nature that is really helpful. I feel quite comfortable playing the same to attempt profiting from a rebound.

 

[the learner]

Hello, I didn't have time to do much trading in the past few months but was interested to know if anyone is trading the strategies discussed in the article I linked earlier.
Given the higher volatility we have seen recently, it would be great to learn from the experience you had trading these option structures in these markets.