OTM call spreads vs OTM put spreads on very high IV

@Robert Morse.. Here's an example... OPHT, Ophthotech has a very high IV. Dec-16 has an IV of about 420, Jan of 320. They are about to come with some results on their phase 3 trial study, dealbreaker or dealmaker as I'm reading it (@vanzandt you might like this thread ;) ).

upload_2016-12-8_13-54-22.png


So, Spot was around 35, Jan straddle value about $30. The vol curve is relatively flat... although from Interactive Brokers Model IV you could say there still is some skew, I think there's not a lot.

So, let's agree upon the fact risk is to the upside... by the looks of expectancy in options, it seems to at least double in value, possibly triple... anywhere from 70-100?

The 25 put = 8.60 (midpoint), which is 10 dollars/30% OTM.
The 45 call = 11.60, also 10 dollars/30% OTM.
So again, the market prices upside the upside risk.
Now, 25-20 PS = 2.50
the 45-5 CS = 1.50

Both have max value of $5, looking at the upside potential / upside risk... that CS sure looks cheap.
 
It is proportionally incorrect. You would have to multiply the difference between the probability of touch between the spreads with the probable payout of a 10pt width spread.

For example,
with delta as an approximation for probability

60@20d - 70@10d
= 10d or 10% x 30%probable payout
= 3%
Conversely, the otherside is 2%. Not so big a difference now.
 
xandman said:
You exit long vols at a profit obviously. I assumed you were worried about a short call spread maintaining it's value after a crash. Are you just basking in the theory?
More...
Yep, just basking at the moment ;)... although theory should never be underestimated, especially in options.
 
xandman said:
It is proportionally incorrect. You would have to multiply the difference between the probability of touch between the spreads with the probable payout of a 10pt width spread.

For example,
with delta as an approximation for probability

60@20d - 7@10d
= 10d or 10% x 30%probable payout
= 3%
Conversely, the otherside is 2%. Not so big a difference now.
More...

So, in my OPTH example... the 45-50 CS has a delta of 5 and the 25-20 PS a delta of 5 as well.

Not that delta's say anything at all at these IV's. Models go haywire this high... and I'm not sure about the delta's interactive brokers are giving me...

So both have the same delta... so similar chance... again, why is the CS 40% cheaper than the PS? Same chance, same payout of $10. Same %-distance from the spot. The 45 call has a d60 and the 25 put a d20, again pointing to upside risk...

@Robert Morse, what does Lightspeed's model say in regards to delta's? Similar I'm guessing since based on the same basics of B&S etc.
 
Last edited:
JackRab said:
So, in my OPTH example... the 45-50 CS has a delta of 5 and the 25-20 PS a delta of 5 as well.
Not that delta's say anything at all at these IV's. Models go haywire this high...
More...

Wow. Crazy numbers. Honestly, I would puke at 100% IV and probably go flat. Thus, my interest in your thread. There's probabaly a different model for extrme vol out there in academia.

5% delta diff x $4/5 payout = 4%
 
Last edited:
JackRab said:
That's probably because you're more of a seller than buyer? ;)
More...


More of a buyer. Can't get pnl volatility down exclusively selling. Selling is for treading water. Playing with long vol back/short vol front strats, so I watch you guys from the business.
 
JackRab said:
@Robert Morse.. Here's an example... OPHT, Ophthotech has a very high IV. Dec-16 has an IV of about 420, Jan of 320. They are about to come with some results on their phase 3 trial study, dealbreaker or dealmaker as I'm reading it (@vanzandt you might like this thread ;) ).

View attachment 168655

So, Spot was around 35, Jan straddle value about $30. The vol curve is relatively flat... although from Interactive Brokers Model IV you could say there still is some skew, I think there's not a lot.

So, let's agree upon the fact risk is to the upside... by the looks of expectancy in options, it seems to at least double in value, possibly triple... anywhere from 70-100?

The 25 put = 8.60 (midpoint), which is 10 dollars/30% OTM.
The 45 call = 11.60, also 10 dollars/30% OTM.
So again, the market prices upside the upside risk.
Now, 25-20 PS = 2.50
the 45-5 CS = 1.50

Both have max value of $5, looking at the upside potential / upside risk... that CS sure looks cheap.
More...

This is on point. It is relevantly cheap at this proximity. I hope we get Bob and Sle back or I may have ruined a really good thread. I'm shutting up now.
 
Okay, after a bit of fiddling around I've come to the conclusion that, because options models use an approximation of a normal distribution adjusted for tails (don't know technical terms here)... this seems to go haywire at extremes (which makes sense since you can't rely on anything normal in the extreme).

Butterflies which follow a normal distribution across strikes in normal conditions... the (near) ATM butterfly has the highest value.... also gamma is highest near ATM. In my example it seams the butterfly peaks somewhere at the bottom... or left however you look at it.
This doesn't make sense at all.... :banghead::confused:... then again, maybe it does.... :(

Where's my quant when I need him!!!!!
 
You must log in or register to reply here.
Back
Top