Greetings Fellow Traders,
Kind of a slow, boring day for me and I'm playing around with scenario analysis on a spread I put on yesterday at the market close. The structure is essentially two combined backspreads (one in each direction). The wings are 1 SD out either way and the ratios are such that the initial position is vega and delta neutral.
I've used this position before and found it to be pretty solid from a risk management perspective. However, the twist on the new version is that I've always put these on using expiries at least a month or more out. This new one is a weekly. While a more "conventional" approach would be to use this in order to trade swings in IV or capture a large spike in RV, I'm thinking that the weekly can be an interesting way to bet on terminal distribution. Basically, put on the spread, rebalance delta and vega as needed throughout the week, and try to lose as little as possible, holding out for a butterfly-like payoff. Of course, the twist is that should a large move occur in either direction, you could also potentially reap quite a windfall payday.
I've backtested a few of these with decent results, and so I decided to try my first on NFLX. Just a small position here to see how it goes. The spread is:
The spread was put on about 30 minutes before close on 12/12/14 when the stock was pinning in the vicinity of 335. The wings are wider than they should be; however, I didn't use the 322.5/347.5 strangle since I figured they'd probably be less liquid.
Anyway, I'll rebalance vega and delta as needed and post the hedges as I execute them. Let's see how it turns out this week.
Any thoughts are welcome.
Thanks
Kind of a slow, boring day for me and I'm playing around with scenario analysis on a spread I put on yesterday at the market close. The structure is essentially two combined backspreads (one in each direction). The wings are 1 SD out either way and the ratios are such that the initial position is vega and delta neutral.
I've used this position before and found it to be pretty solid from a risk management perspective. However, the twist on the new version is that I've always put these on using expiries at least a month or more out. This new one is a weekly. While a more "conventional" approach would be to use this in order to trade swings in IV or capture a large spike in RV, I'm thinking that the weekly can be an interesting way to bet on terminal distribution. Basically, put on the spread, rebalance delta and vega as needed throughout the week, and try to lose as little as possible, holding out for a butterfly-like payoff. Of course, the twist is that should a large move occur in either direction, you could also potentially reap quite a windfall payday.
I've backtested a few of these with decent results, and so I decided to try my first on NFLX. Just a small position here to see how it goes. The spread is:
The spread was put on about 30 minutes before close on 12/12/14 when the stock was pinning in the vicinity of 335. The wings are wider than they should be; however, I didn't use the 322.5/347.5 strangle since I figured they'd probably be less liquid.
Anyway, I'll rebalance vega and delta as needed and post the hedges as I execute them. Let's see how it turns out this week.
Any thoughts are welcome.
Thanks
