Merits of synthetic short call with long call

[badlucktrades]

Actually I gave back a bit of what was a profitable day for me on that move. Note that I said nothing about P&L before. My point was that the move itself was not unreasonable based on current market conditions.

I make no prediction about direction, and while I have to make some judgment call on timing (via my choice of expiration), by no means am I capable of being that granular (to the hour). I price and hedge vol using what I believe to be a reasonable forecast and adjust my various risk exposure as needed. But to some extent, yes vol usually tends to pick up in the mornings (open to Euro close), slow down for a few hours in the middle, then pick up again in the afternoons. In this market especially, there is a lot of vol-of-vol. This means hourly realized vol patterns might look like this:

30%....45%....10%....5%....5%....25%....40% (made up numbers, just painting a picture)

So please don't misconstrue my original comment as me bragging that I knew what the market was going to do. I had no idea. I'm just saying that it doesn't stand out to me as anything of significance based on the volatility regime we currently find ourselves in.

Oh okay, because I thought you were suggesting you could predict direction and wanted to learn what you were looking at, if you were willing to offer it up. I guess looking at it, the 193.50 wasn't really out of the question for a move.

Based off how I charted the IV levels, at 2pm, it just seemed a bit of a reach for it to to hit 193.50 . It looked liek a 1.5/ 1.75 STD move

https://www.tradingview.com/x/CX9kcJUS/

have you also noticed that the prices tend to hover around IV ranges? or am I crazy...

I've been seeing a lot of hesitation from the movement of the spy at these levels....The price always seems to move in very even movements. i.e if the range is 1, i will see it hover at 0.25,0.5,0.75 ..almost always bisecting the ranges..you can see the lines i drew in the chart. Those were drawn at around 2..and the end of the day movement, always seems to hover near those areas.

 

[longthewings]

You're not crazy. Most people describe volatility as being mean-reverting over a fairly clear defined range. There are caveats to this, such as sampling frequency, formula choice, etc. Just recognize that while that's often true, jumps happen. In the last month there has been a dramatic repricing which has shifted the range well higher (from around ~13-14 on average to ~25-30+). The range is wider too (high vol-of-vol). The potential for jumps in vol regimes is a very important consideration when structuring a trade.

On the indices, one possible explanation for range bound IV is the "sticky-strike" regime. In a short-term driftless market, your expected move over an arbitrary interval is zero. The index pops around and the vol dominates. In a sticky-strike regime this means you essentially have a defined playing field within the strike space, and there's a high probability that the majority of observations will be contained in that space. Think of the S&P 500....two months ago we were stuck in that 12-16 vol range over 2050 - 2130. It was no coincidence that the observed IV skew went from about ~16 on the downside 2050 puts to 9% or so on the upside calls. Now assume sticky strike. For simplicity, pretend that moment to moment, whatever ATM vol is will translate into the subsequent period realized vol. It's not hard to see how it will play out. You get stuck in a range, cycling the vol sideways up and down.

It took a dramatic event to finally break us out of that regime, and now we've shifted well upward. The distribution has fundamentally changed. I expect us to be here for a while longer, since the same type of market dynamics will likely cause us to bounce around in this new range until a catalyst sends us somewhere else.

 

[badlucktrades]

well that

You're not crazy. Most people describe volatility as being mean-reverting over a fairly clear defined range. There are caveats to this, such as sampling frequency, formula choice, etc. Just recognize that while that's often true, jumps happen. In the last month there has been a dramatic repricing which has shifted the range well higher (from around ~13-14 on average to ~25-30+). The range is wider too (high vol-of-vol). The potential for jumps in vol regimes is a very important consideration when structuring a trade.

On the indices, one possible explanation for range bound IV is the "sticky-strike" regime. In a short-term driftless market, your expected move over an arbitrary interval is zero. The index pops around and the vol dominates. In a sticky-strike regime this means you essentially have a defined playing field within the strike space, and there's a high probability that the majority of observations will be contained in that space. Think of the S&P 500....two months ago we were stuck in that 12-16 vol range over 2050 - 2130. It was no coincidence that the observed IV skew went from about ~16 on the downside 2050 puts to 9% or so on the upside calls. Now assume sticky strike. For simplicity, pretend that moment to moment, whatever ATM vol is will translate into the subsequent period realized vol. It's not hard to see how it will play out. You get stuck in a range, cycling the vol sideways up and down.

It took a dramatic event to finally break us out of that regime, and now we've shifted well upward. The distribution has fundamentally changed. I expect us to be here for a while longer, since the same type of market dynamics will likely cause us to bounce around in this new range until a catalyst sends us somewhere else.

well that certainly helps in terms of trading..have you noticed, that on the short term if a stock crosses what is expected to be 2std, theres a rebound there?

 

[jimmyjazz]

ok so another question, ultimately you have to be right in the direction.

I think you need to be careful with statements like this. At the risk of sounding Clinton-esque, you need to define "right". I might be trading a bull spread strategy where I can sustain a 5% drop in the underlying and still make money. One could argue that this trade may or may not make sense in terms of expectation, but it's entirely possible to trade profitably with a sense of direction and still make money when you're wrong.

I leave it to you to consider the vol implications of these trades.

 

[jimmyjazz]

well that

well that certainly helps in terms of trading..have you noticed, that on the short term if a stock crosses what is expected to be 2std, theres a rebound there?

You're looking for a recipe, and nobody is gonna give you that. I'm pretty sure we've all seen enough trades blow out the bottom 2STDV Bollinger band and never look back to question the validity of trying to trade the touch. Backtest it yourself if you really want to know.

 

[badlucktrades]

You're looking for a recipe, and nobody is gonna give you that. I'm pretty sure we've all seen enough trades blow out the bottom 2STDV Bollinger band and never look back to question the validity of trying to trade the touch. Backtest it yourself if you really want to know.

im just asking if you guys have noticed that as well. ive noticed it and have been trading like that.

 

[longthewings]

well that

well that certainly helps in terms of trading..have you noticed, that on the short term if a stock crosses what is expected to be 2std, theres a rebound there?

Again maybe others have had success with something along those lines. That's a bit too granular for me, so I can't really comment on it.

 

[badlucktrades]

Again maybe others have had success with something along those lines. That's a bit too granular for me, so I can't really comment on it.

ok thanks for the information though.

 

[badlucktrades]

what do you guys think of this explanation of put call parity