Option replication and exotics journal

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Dax double barrier[binary k/o range] -- 4820/4980 K/Os
Premium: $59,500 EUR
Payout: $150,000 EUR [includes prem paid]
Expires: Aug 10, 2005
Negative edge: $8,100 EUR
Neutrality: 4900 basis DAX cash

Been following the gammas on this one and the broker is offering it under $60k. Bought it a few minutes ago.
 
I thought I'd amend this journal to add long butterflies. I run an account that strictly-packages butterflies and the occasional condor. I thought it would be interesting to discuss the various natural and synthetic butterflies and some inherent advantages.

Short gamma/vega will be expressed as long butterflies; irons and synthetics included. I trade roughly equal numbers of natural flys and converted combo:fly positions. I will try to be consistent with terminology.

The goal is to trade the natural flys to a 1:1 reward. This only concerns flys which were purchased as naturals[netted]. I won't follow this r/r when legging/converting a combination-fly[iron or synthetic].

A majority of flys will be straddle[natural&synthetic] sales converted to iron-flys through the purchase of the wing-combo at some time in the future... possibly same-day, but up to a week. The goal of the conversion is an net-arbitrage-credit on the position[post-conversion], so that: net credit rec'd > distance between strikes, ignoring sign.

All legged/converted positions will consist of an initial short combo[downside-gamma] followed by the purchase of the wing combo[upside-gamma]. Downside/upside refers to the curvature of gamma, not a directional-bias.
 
Potential fly conversion:

Sold x GOOG Sep 300 straddles at $25.30 & 30.30% vols. Market was 25.20x25.60 on ISE's spread/combo order line.

280/320 wing combo is trading at 10.30x10.70 & avg. 31.00% vols.

Have not purchased the wing combo -- netted fly is trading at [$14.80], risk of $5.20.

The goal is to earn decay at the risk of gamma while earning opportunity theta on the wing combo within a week's time. Doubtful we'll see more than 2-3 points reduction in the current mark on the fly. We'll see, but I'd like to own the completed fly at a risk of $2.60 or lower.
 
Quote from riskarb:

The YM/ER2 short vol-box has widened a bit. I can't stand watching this thing, but I am going to hold it to expiration out of pure-spite. I won't be trading these corrs again.
More...

Edit: it's a long vol-box. Still watching it, at least the corrs are moving my way.
 
Quote from riskarb:

Dax double barrier[binary k/o range] -- 4820/4980 K/Os
Premium: $59,500 EUR
Payout: $150,000 EUR [includes prem paid]
Expires: Aug 10, 2005
Negative edge: $8,100 EUR
Neutrality: 4900 basis DAX cash

Been following the gammas on this one and the broker is offering it under $60k. Bought it a few minutes ago.
More...

Short 20 FDAX from 4894 avg.
 
Quote from riskarb:

Potential fly conversion:

Sold x GOOG Sep 300 straddles at $25.30 & 30.30% vols. Market was 25.20x25.60 on ISE's spread/combo order line.

280/320 wing combo is trading at 10.30x10.70 & avg. 31.00% vols.

Have not purchased the wing combo -- netted fly is trading at [$14.80], risk of $5.20.

The goal is to earn decay at the risk of gamma while earning opportunity theta on the wing combo within a week's time. Doubtful we'll see more than 2-3 points reduction in the current mark on the fly. We'll see, but I'd like to own the completed fly at a risk of $2.60 or lower.
More...

Trade rationale pasted from another thread:

The gamma:theta is linear. Since the atm straddle is downside-gamma[curvature] there is spot-vol concerns expressed as delta-position. Obviously gamma drives the delta, but the gamma isn't geared in the straddle.

I expect GOOG spot vols to decline to the 28-vol-line[from 30v] for the atm combo. The daily vols have been spotty, but generally mean-reverting to the 300 handle. I don't see a lot of directional-vol in the shares. The wings exhibit opportunity greeks, as my hand is not forced if my spot vol prediction is correct, and the potential vol/theta gains from the wings are replicated by buying the wings < current offer on that combo.

Add to that, the wing vol is high due to the prevailing 200basis in call skew on the 20d otm vol-line. There is still some hope by the public that the stock will exhibit upside vol, which i don't expect, so a flattening of the smile will help.

Summary: The edge will be expressed by a larger credit on the converted iron fly than is currently possible.
 
Interesting thread. Thanks for starting it, and I hope you'll run with it for as long as you feel like. I suspect I'll learn a lot from it.

Thanks again,
Steve
 
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