What is easier to adjust? A ratio write--long stock, short two calls; a ratio call spread; or a ratio put spread? It seems that with the puts it is harder or near impossible to roll down and retain a wide profit zone, but with the calls and the ratio write it is much easier to adjust either way.
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Ratio spreads
- Thread starter backflip
- Start date
Quote from backflip:
What is easier to adjust? A ratio write--long stock, short two calls; a ratio call spread; or a ratio put spread? It seems that with the puts it is harder or near impossible to roll down and retain a wide profit zone, but with the calls and the ratio write it is much easier to adjust either way.
A 1x2 ratio write is simply a synthetic straddle. Strike price = natural straddle strike. Option frontspreads[short backspreads] are notoriously difficult to hedge. There isn't enough gamma in the long to hedge the shorts when the sh*t hits the fan. Made worse by the modal-flip on curvature when the long goes itm[-dgamma] -- the shorts always maintain curvature[+dgamma], which is bad. Trade them close to expiration.
As an example -- short backspreads are the vanilla analog of an exotic up and out call [down and out put]. They are basically "trade and pray" strategies.
Huh?Quote from riskarb:
A 1x2 ratio write is simply a synthetic straddle. Strike price = natural straddle strike. Option frontspreads[short backspreads] are notoriously difficult to hedge. There isn't enough gamma in the long to hedge the shorts when the sh*t hits the fan. Made worse by the modal-flip on curvature when the long goes itm[-dgamma] -- the shorts always maintain curvature[+dgamma], which is bad. Trade them close to expiration.
As an example -- short backspreads are the vanilla analog of an exotic up and out call [down and out put]. They are basically "trade and pray" strategies.
Don
Maybe, but most adjustments require buying and selling. So the question may be what is more liquid calls or puts. Maybe that question is best answered by looking at the open interest figures for the underlying.Quote from nazzdack:
backflip...........you'll find it easier to buy calls during a strong market rally compared to buying puts during a strong market decline. You may want to "bias" your trading that way.
Also in my experience ITM contracts generally have wider B/A spreads than OTM. So if you knew which direction is likely maybe picking the resulting OTM contract makes sense.
Don
Quote from riskarb:
A 1x2 ratio write is simply a synthetic straddle. Strike price = natural straddle strike. Option frontspreads[short backspreads] are notoriously difficult to hedge. There isn't enough gamma in the long to hedge the shorts when the sh*t hits the fan. Made worse by the modal-flip on curvature when the long goes itm[-dgamma] -- the shorts always maintain curvature[+dgamma], which is bad. Trade them close to expiration.
As an example -- short backspreads are the vanilla analog of an exotic up and out call [down and out put]. They are basically "trade and pray" strategies.
Riskarb,
I've been dabbling with the idea of using backspreads on both sides (wrangle?) with a week till expiration. I was thinking there might be advantages with the high theta on the short options and the gamma curvature for the longs. Vol seems to be less of a factor being that close to expiration.
I know it's a relatively simple idea and I haven't actually traded this nor am I experienced with it. Considering your experience I was hoping to get your thoughts.
Thanks in advance...
Quote from cohenmichaela:
Riskarb,
I've been dabbling with the idea of using backspreads on both sides (wrangle?) with a week till expiration. I was thinking their might be advantages with the high theta on the short options and the gamma curvature for the longs. Vol seems to be less of a factor being that close to expiration.
I know it's a relatively simple idea and I haven't actually traded this nor am I experienced with it. Considering your experience I was hoping to get your thoughts.
Thanks in advance...
You'll be selling backspreads? If so, you'll need to structure both as otm to benefit from convexity. Plus, the short ops gamma loss from distro will exceed their convexity. The downside is the lack of any convergence gains due to the low absolute gammas with otm spreads.
Quote from riskarb:
You'll be selling backspreads? If so, you'll need to structure both as otm to benefit from convexity. Plus, the short ops gamma loss from distro will exceed their convexity. The downside is the lack of any convergence gains due to the low absolute gammas with otm spreads.
Sorry, perhaps I misunderstood your previous post. I was referring to long backspreads (short ATM, long OTM 2x3) done for a credit.
Quote from cohenmichaela:
Perhaps I misunderstood your previous post. I was referring to long backspreads (short ATM, long OTM 2x3) done for a credit.
Gotcha. Long the backspread does benefit from curvature, but it's a small benefit when weighed against otm gammas/convexity and decay. Convexity gains are overwhelmed by absolute gamma. It will do ok in a flat or chaotic market. Tough conditions.