when you trade options, what is your target objective for having a higher probability of profit for your positions? outside of being right on the direcrion.
Merits of synthetic short call with long call
- Thread starter badlucktrades
- Start date
i closed out the position, although it wouldve been profitable if i didnt buy those 3 calls, but instead only bought one.
Short SPY + long 198 call = a long put at 198. You can derive the put premium from P/C parity. I would do it here, but I don't want to further complicate the following.
So you're long a Sep18 198 put, short a Sep25 197 put.
Typically, someone shorting a calendar wants to benefit from high implied vols. Great, vols are still in the upper three deciles. The problem is the duration of the back-end as well as the spread between durations.
You're not long enough (in time) to warrant a short vol diagonal. There is no utility in going seven days between contracts and one handle in strike width (197, 198).
So IMO it makes very little sense to trade the diagonal and pay the haircut in this trade. There are better short vol positions, IMO.
I do like the fact that the short Sep25 is a strike under the synthetic long put. That is the right idea.
Not a terrible trade, and you will make more on upside SPY due to inverse correlation if you're right (vol will drop if SPY rallies). The problem with it is that it's basically a long risk-reversal, and as such, close to an outright long SPY. IOW, it's basically long shares. I had mentioned that in your prior thread. These things are close to delta1 (long or short SPY).
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Okay,
so what im getting is that your telling me that these are essentially the same trade in terms of risk/reward. is this also assuming that for ex: a call will increase at the same price a put will decrease by?
If thats the case, arent options priced imperfectly, so the above assumption is false?
i.e correct me if im misinformed here, but if youre short call and short put, you're essentially delta neutral, if they are priced the same. If they are imperfect, then theres opportunity to profit on either of the legs without it being offset but the other.
Forget imperfect pricing (one strike apart) unless you're referring the vol-line (vol too high or too low, overall). You are not going to find mis-priced SPY from one strike apart.
SPY at 198; short the SPY 198 call and put. You are neutral at inception (to delta). Your gamma will tell you speed at which your risk increases in terms of delta. IOW, you will never be neutral for long. Do you need to be? No, you can make money from a short straddle provided the actual forward vol (of the underlying shares) is less than the vol you shorted.
The vol-smile relates to the demand for hedging in "down and out" puts and is why deep OTM strikes under the mkt are so much more costly. The vol is dominated by the buying of OTM puts, but the same-strike calls are also very costly (actually identical in vol%) due to P/C parity. IOW, if I pay 40-vol for a put I would have to pay 40-vol for the same-strike call.
We could go on for months discussing this stuff, but you won't understand it without a basic understanding of the pricing mechanics and basic arbitrage equivalence. The you go on to pricing basica spreads and combos, risk-reversals, rate-arbs (conversions, boxes, rolls), stickiness, etc.
Look up Natenberg, McMillan, Baird in options on Amazon. I mentioned this in the other thread.
SPY at 198; short the SPY 198 call and put. You are neutral at inception (to delta). Your gamma will tell you speed at which your risk increases in terms of delta. IOW, you will never be neutral for long. Do you need to be? No, you can make money from a short straddle provided the actual forward vol (of the underlying shares) is less than the vol you shorted.
The vol-smile relates to the demand for hedging in "down and out" puts and is why deep OTM strikes under the mkt are so much more costly. The vol is dominated by the buying of OTM puts, but the same-strike calls are also very costly (actually identical in vol%) due to P/C parity. IOW, if I pay 40-vol for a put I would have to pay 40-vol for the same-strike call.
We could go on for months discussing this stuff, but you won't understand it without a basic understanding of the pricing mechanics and basic arbitrage equivalence. The you go on to pricing basica spreads and combos, risk-reversals, rate-arbs (conversions, boxes, rolls), stickiness, etc.
Look up Natenberg, McMillan, Baird in options on Amazon. I mentioned this in the other thread.
will definitely look into this book. thanks for your help. really appreciate it.
so how profitable have you been and has this author been?
not profitable this year at all. started trading options about a year ago and only recently formed a strategy. Once i formed a strategy in jan, every month has been positive while following the system, but its making up for the losses from no strat.
was profitable trading stocks throughout the crash. then took time off for scho and just started with options last year.
right now I have about 13k i trade with, ill let you know in 6 months whether im still profitable.