Options Spread trade

nitro

nitro

Interesting options spread for the current levels of IV:

Long 2 Jun 1460 ES calls @ 41.0. Gamma = 0.0041 Delta = + 0.5575 IV = 11.25%
Short 2 Mar 1525 ES calls @ 1.55. Gamma = 0.0041 Delta = - .0892 IV = 7.82%

Short 1 ES at market Approx 1459.50 Delta = -1.0
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Total Gamma of position: 0
Total Delta of position: -1.0 + 0.9366 = -0.0634 (nearly zero, with a touch negative, which is what I want)

This is a gamma and delta neutral, long vega, debit diagonal calendar spread. It is a pure vol trade. If the IV goes higher, I make money. If it goes nowhere or lower, I lose. Theta is against the position.

With two weeks to expiration of the April 1525 call, roll to the March contract, staying delta and gamma neutral. If the position goes profitable and the gamma and delta get too far from zero, adjust.

nitro
 
I don't know about ES but long time calendar's/diagonals are very tough to do successfully on the SPX when you are selling so far OTM in March and buying so far out in time (June). Remember if vols rise then most likely the direction is down and the value of your June call will dramatically decline with the delta's going down. Volatility may not make up for that.

Your also getting the short end of the stick as far as vols are concerned...selling the low vol and buying the high vol. You might try a trade for Mar/Apr.

When we had very low vols (in the 9's) in Nov I did a Nov/Mar calendar and will, at best break, even on it this month...more likely lose a couple of $$.
 
Quote from RichardRimes:

... Remember if vols rise then most likely the direction is down and the value of your June call will dramatically decline with the delta's going down. Volatility may not make up for that.
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Huh? As the ES goes down, the IV goes higher as long as the ES is not range bound so that I get eaten up by theta. Violent moves down is good for this position as it is positive vega. Perhaps you missed the short ES position that is part of the total spread? I pick up negative deltas as the ES goes lower, albeit slowly as the gamma is zero (at the time of initiating the trade).

...When we had very low vols (in the 9's) in Nov I did a Nov/Mar calendar and will, at best break, even on it this month...more likely lose a couple of $$.
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Sure, but that is because vol between then and now has been going nowhere, at 20 year lows.

If what you are saying is true, then the reverse of my trade looks attractive. But there is no juice in selling options at current IV levels.

nitro
 
Quote from runningman:

What's the potential profit/loss of a position like this?
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The only thing that blows about this position is that it is negative theta. The theta of the jun is -.14, and that of the March is -.10. That is the part of the reason for the short March, to protect some of the theta that you are paying for the long Jun, as well as to aid being delta and gamma neutral.

Otherwise, an options simmulator like TOS or OptionVue can plot the PnL of this composite position: at expiration, as time evaporates, as a function of IV, and per underlying move, etc. I would post a chart of it, but my TOS is not working...

nitro
 
nitro,

i would be skeptical about the way TOS models your $vegas. It is unlikely that you pick up much if any $vegas within 1 monthly sigma due to the skew.

Position is a synthetic june straddle with a short nearer term call to offset your theta bleed. If -theta is a concern, have you thought of overselling and managing the -gamma on the fly? Also, you could bring the call closer to pick up premium. This far OTM, the vols are too cheap to be selling them IMO.
 
Quote from rallymode:

nitro,

i would be skeptical about the way TOS models your $vegas. It is unlikely that you pick up much if any $vegas within 1 monthly sigma due to the skew.

Position is a synthetic june straddle with a short nearer term call to offset your theta bleed. If -theta is a concern, have you thought of overselling and managing the -gamma on the fly? Also, you could bring the call closer to pick up premium. This far OTM, the vols are too cheap to be selling them IMO.
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Hmmmm,

I see what you are saying. Let me think this through...

Out of curiosity though, are you saying that TOS model of vega is at best suspect? Can you elaborate? is it because they don't treat skew correctly?

BTW, the Mar is the March 30 exp, not the 16th...

nitro
 
Quote from nitro:

Hmmmm,

I see what you are saying. Let me think this through...

Out of curiosity though, are you saying that TOS model of vega is at best suspect? Can you elaborate? is it because they don't treat skew correctly?

nitro
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Suspect is putting it mildly. You need to model each strike independently to gain a proper picture of what you should expect in terms of $vega PnL. Your ATM call straddle will become an OTM call straddle as we sell off. Look at the OTM straddle and compare vols. You need to balance the skew against the increase in strip vols(VIX) to get an accurate $vega picture. I am not saying you won't net gain on vols, but you need a strip vols increase that will overwhelm the -skew.

As you outlined in your original post, the short calls are ticking at 782bps. I would avoid selling those whether to finance a straddle or as a stand alone position.
 
Quote from nitro:

Huh? As the ES goes down, the IV goes higher as long as the ES is not range bound so that I get eaten up by theta. Violent moves down is good for this position as it is positive vega. Perhaps you missed the short ES position that is part of the total spread? I pick up negative deltas as the ES goes lower, albeit slowly as the gamma is zero (at the time of initiating the trade).



nitro
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your correct in that your ES is a hedge...still I think the near month is way to far OTM
 
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