Option replication and exotics journal

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riskarb

I thought I would start an Option replication journal, including some exotic option trades in FX and equity vol. Trades will focus on replicating intramarket-gamma in equity index and street volatility, as well as trading exotics in FX wtih truncated-payoff conventions.

Only replication trades with the following conditions will be posted:

*** Net +gamma[dgamma+]
*** Net +vega
*** Net +shadow-theta[convergence gains]

RISKS:

*** Correlation risk -- large in street vol, small in index vol. Will try to maintain -- +gamma/+vega position > position-correlation risk.

The exotics will consist of truncated payoff position[TPP]; knockin/out combos, touches/no touches[combos/singles].
 
Thanks Trajan.

ER2 dramatically underperformed the narrow-index markets. Corrs between the YM and ER2 were negative today, but leaves a potential opportunity for the August series; if/when the corrs return to the mid-80%s.

Buying 2 Aug YM 10600 puts at 9.50% vol [105]
Selling 1 Aug ER2 950 puts at 17.00% vol [7.90]

Net position debit: $260

Potential edge(s):

Long vega
Long gamma
Short delta
+dgamma position
Long convergence -- from favorable ratio and delta position. +dgamma -- cheap vol equates to cheap gamma in otm options. YM vol at 750basis under ER2 provides for a +gamma curvature and gearing[significant +slope].

Risks:

Correlation was negative on the day. Such is the concern when trading narrow index markets like YM vs. a broad index like the ER2/RUT.

Expect gains from favorable ratio and delta position to overwhelm correlation risks. Unlikely we'll see another opportunity to trade this spread at such favorable terms. Hope to see a double over the net debit paid by expiration. Will follow up as need be.
 
Looking to be flat to long delta in EUR/USD due to tame-reaction to the blistering Retail data and CPI. The vol-skew is flat, so it was a toss-up whether to go long spot/risk-reversal or short spot/risk-conversion, but it more closely resembles a synthetic short straddle using exotics.

*** Long 100k EUR/USD at 1.2082
*** Short 200k EUR/USD touch exotic, struck at 1.2220, expiring July 22 at 10amEDT

***Long 70k EUR/USD touch exotic, struck below the recent lows at 1.2038

To limit the confusion... the position loses $600 at the 1.2220 strike and earns approx. $2,600 at the lower strike{at expiration].

I expect the lower[1.2038] strike to be hit resulting in a payout. With luck the EUR/USD will hit my long touch at 1.2038 and creep higher. In either case it resembles a bull synthetic short straddle with a long put. There is a lot of bleed in the greeks; too much so to break the position down any further.
 
Mr. Ignorance back again, :)

What's an ER2 950 put. Aren't we around 660 right now?

What are the bracketed numbers in your examples?

I tried looking up the IV on IB's option trader and got radically different numbers. I could only get IWM on Ivolatility.com and they were around 15% IV right now.

Rather than bother you with a ton of obvious questions -- from your point of view :) -- can you recommend somewhere I can read up on this type of trade? :)

Thanks,

Sam
 
Quote from riskarb:
Buying 2 Aug YM 10600 puts at 9.50% vol [105]
Selling 1 Aug ER2 650 puts at 17.00% vol [7.90]

Net position debit: $260
More...

I'll be the first to admit that I only understand what you are doing generally, but...:)

Can you define the risk/reward on this one for me. That ER2 position would make me a bit nervous.
 
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