Riskarb's combo to fly conversion journal

R

riskarb

A simple to follow journal of vanilla equity and equity index short combo to iron butterfly conversions; short gamma/vega and long theta at neutral delta. Conforms to my basic tenet to sell downside and buy upside gamma curvature.

Ticker selection is done in bloomberg and a proprietary model in which the primary logic datamines for a small initial gamma/theta value. The initial position will consist of a short downside gamma combo[straddle] traded into the weekend decay -- either on Thursday's close or Friday's opening rotation.

The initial short gamma/vega combo will be converted to a short iron fly[synthetic long call or long put fly] when/if certain conditions are met; a flattening of the vol-smile[wing vol compression], opportunity gains from an strip-vol decline, sufficient decay, or simply an arbitrary time limit or delta position incurred on the short body strike.
 
The bloomberg model-output:

BMHC 77+ Feb 75
CEPH 73+ Feb 75
NOV 69+ Feb 70
PD 143+ Feb 140 ... judgement call, CU and share rollover
SNDK 77+ Feb 75
TIE 71+ Feb 70

These will be traded as combo-orders through ISE or intermarket execution tomorrow between 9:30 and 10:30am EST.

You'll see a pattern developing; share price > 60 and vols > 40. The plan is to sell the neutral delta straddle. No strangles will be sold -- I'll select a strike to match the smile or my delta preference if the share is split strike.

These should be traded small; no more than two-lots per $10k committed capital. Capital outlay will be minimal once the combos are converted.

Thanks for your comments; gals and guys.
 
Hi riskarb. Could you please explain your basic tenet of selling downside gamma and buying upside gamma curvature. I think I understand the latter part. Ex XYZ at 50, youd be buying 60 calls which is buying upside curvature, how do u sell downside curvature and why would you? Are down moves more violent ?Thanks
 
The peak of the gamma distro occurs at the atm strike. Selling the atm straddle is said to be selling downside curvature. The straddle bleeds gamma, at the expense of delta accumulation, as we trade away from delta neutrality, so the gamma slope implies negative gearing. There isn't any directional implication.
 
Quote from riskarb:

The bloomberg model-output:

BMHC 77+ Feb 75
CEPH 73+ Feb 75
NOV 69+ Feb 70
PD 143+ Feb 140 ... judgement call, CU and share rollover
SNDK 77+ Feb 75
TIE 71+ Feb 70

These will be traded as combo-orders through ISE or intermarket execution tomorrow between 9:30 and 10:30am EST.

You'll see a pattern developing; share price > 60 and vols > 40. The plan is to sell the neutral delta straddle. No strangles will be sold -- I'll select a strike to match the smile or my delta preference if the share is split strike.

These should be traded small; no more than two-lots per $10k committed capital. Capital outlay will be minimal once the combos are converted.

Thanks for your comments; gals and guys.
More...

when do you exit position ? Holding to Feb exp ?
 
Excellent! A journal for morons like me to follow. Your vanilla plays got kind of buried in your replication journal and were omitted from blotter so this is great stuff.

Don't want to pre-empt your ongoing commentary but a few quick questions:

1) How far out are we talking to get the small gamma/theta you are after? If looking at the Thursdays, either 30 days or 23 days out seems like the most likely candidates. Have had most success <30 days on flies myself, no more.

[EDIT] Okay I see from above you're willing to go a week further out.

2) My cursory research has led me to believe that weekend decay has mostly been priced in by Friday afternoon, is that why you're looking at Thursday close/Friday Morning?

3) When screening, are you SPECIFICALLY looking for candidates with likely declines in strip-vols and/or smile flattening i.e. after large moves or is that just a side-effect that you would look to take advantage of after-the-fact for conversion to iron.

4) Further to above, when screening for IV at certain levels are you taking into account relative historic levels?

Look forward to the journal.

MoMoney.


Quote from riskarb:

A simple to follow journal of vanilla equity and equity index short combo to iron butterfly conversions; short gamma/vega and long theta at neutral delta. Conforms to my basic tenet to sell downside and buy upside gamma curvature.

Ticker selection is done in bloomberg and a proprietary model in which the primary logic datamines for a small initial gamma/theta value. The initial position will consist of a short downside gamma combo[straddle] traded into the weekend decay -- either on Thursday's close or Friday's opening rotation.

The initial short gamma/vega combo will be converted to a short iron fly[synthetic long call or long put fly] when/if certain conditions are met; a flattening of the vol-smile[wing vol compression], opportunity gains from an strip-vol decline, sufficient decay, or simply an arbitrary time limit or delta position incurred on the short body strike.
More...
 
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