Riskarb's combo to fly conversion journal

Quote from momoneythansens:

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?

Correct

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.

The bloomberg data only allows for implied/statistical and share-price search; at least in terms of option-specific parms. So the answer would be no, but I do run the vol-skew on each to find for slope and asymmetry and take that into consideration.

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

I can do it with a few mouse clicks in bbg, but I won't take that into account for these journal trades. I don't want to be that selective; preferring to trade as many issues as possible. Adding another parm would only add complexity.

Look forward to the journal.

Thanks

MoMoney.
 
Quote from DonnaV:

big stocks with greater than 40 vol...is there a max vol you would not go above?
More...

No need, as I weed-out the sub-$10 shares with silly model-vols with a share price minimum on the scan.
 
Risk:

Although I understand greeks I do not speak it as fluently as you ;). So let me walk through one example to make sure I am with you.

CEPH +73+ FEB 75

which I would assume is CEPH at $73, you are selling the FEB $75 Straddle.

Are you looking for pumped up IV and hoping to profit from the weekend theta AND an IV pullback?

As for rolling into IRON FLY, if the stock pushes higher, you are buying the OTM calls to hedge and offset the delta/gamma to an extent (because decrease in delta/gamma on put side also helps)?

Is the goal to keep the position hedged while caputuring the theta and IV decrease while only going long OTM options for hedging, thus grabbing prmeium in little incremens each trade? Like buying the straddle and trading against it, here you are selling the straddle and hedging against it as needed?

Thanks!

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...
 
BMHC 77+ Feb 75... $10.20... 52%
CEPH 73+ Feb 75... $8.20...44%
NOV 69+ Feb 70... $6.80...40%
PD 143+ Feb 140 ... $14.60...43%
SNDK 77+ Feb 75... $13.70...74%
TIE 71+ Feb 70... $10.90...64%

I have not executed these due to my late-start this morning. I fully intend to trade each issue, but I don't want to chase anything. Many of these approached neutrality after the opening, reducing credits.

I priced these at the prevailing combo-bid or a dime above. These would be immediately filled.
 
Thanks. So you're not really betting on mean reversion as such, but rather implied over statistical differentials.

Presumably, Bloomberg allows for searching/filtering on open interest, liquidity parameters too or do you check that out after?

Being a bit of a leech here, so last question for the mo: when modelling the vol smile, do you use calls, puts, average or OTM? I realise p/c parity makes differences negligible.

MoMoney.

Quote from riskarb:

Quote from momoneythansens:

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?

Correct

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.

The bloomberg data only allows for implied/statistical and share-price search; at least in terms of option-specific parms. So the answer would be no, but I do run the vol-skew on each to find for slope and asymmetry and take that into consideration.

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

I can do it with a few mouse clicks in bbg, but I won't take that into account for these journal trades. I don't want to be that selective; preferring to trade as many issues as possible. Adding another parm would only add complexity.

Look forward to the journal.

Thanks

MoMoney.
More...
 
Quote from optioncoach:

Risk:

Although I understand greeks I do not speak it as fluently as you ;). So let me walk through one example to make sure I am with you.

CEPH +73+ FEB 75

which I would assume is CEPH at $73, you are selling the FEB $75 Straddle.

Are you looking for pumped up IV and hoping to profit from the weekend theta AND an IV pullback?

As for rolling into IRON FLY, if the stock pushes higher, you are buying the OTM calls to hedge and offset the delta/gamma to an extent (because decrease in delta/gamma on put side also helps)?

Is the goal to keep the position hedged while caputuring the theta and IV decrease while only going long OTM options for hedging, thus grabbing prmeium in little incremens each trade? Like buying the straddle and trading against it, here you are selling the straddle and hedging against it as needed?

Thanks!
More...

Pumped IV -- no, nothing that predictve. Simply trading whatever bbg sends my way. Disregarding earnings, news, etc...

Nope, I won't trade any adjustments other than a wing-strike purchase or an offset due to the inability to profitably buy the aforementioned.

I would trade long gamma intraday if trading discretely -- buying the wing vol and waiting for delta position to increase in the straddle. It's labor intensive, and virtually impossible to see delta gains[straddle opportunity] > execution edge loss when looking to an intraday time-frame. IOW, It's not in my wiring to buy a ton of wing vol and hold the vegas waiting for an opportunity to sell the body that may never come[profitably].
 
Quote from momoneythansens:

Thanks. So you're not really betting on mean reversion as such, but rather implied over statistical differentials.

Presumably, Bloomberg allows for searching/filtering on open interest, liquidity parameters too or do you check that out after?

Being a bit of a leech here, so last question for the mo: when modelling the vol smile, do you use calls, puts, average or OTM? I realise p/c parity makes differences negligible.

MoMoney.
More...

My mistake. I won't be using a stat-vol parm in the scans. I can, but I wanted to keep it as KISS as possible; ignoring any data other than IV, smile and share price. Smile is only used for strike selection, no prediction is made based upon curvature.

I use call vols in shares, put vols in index. It makes no functional difference, but I don't know whether bbg factors itm liquidity and models both the otm and itm. I would assume both are utilized in the calcs.
 
Phil,

I think one way to think about it, or at least the way I think about it is that the intention is to leg in to/convert to the limited risk fly for less than fair value or "build expectancy" etc.

This is achieved by assuming some risk for a period of time and earning theta both on the short straddle as well as getting into the long strangle for less or by favourable skew slope activity etc.

I personally didn't see it as a negative gamma scalping strategy as you suggest.

Just re-iterating this for my own benefit! I'm sure riskarb will give a more accurate summary in his inimitable style.

MoMoney.

Quote from optioncoach:

Risk:

Although I understand greeks I do not speak it as fluently as you ;). So let me walk through one example to make sure I am with you.

CEPH +73+ FEB 75

which I would assume is CEPH at $73, you are selling the FEB $75 Straddle.

Are you looking for pumped up IV and hoping to profit from the weekend theta AND an IV pullback?

As for rolling into IRON FLY, if the stock pushes higher, you are buying the OTM calls to hedge and offset the delta/gamma to an extent (because decrease in delta/gamma on put side also helps)?

Is the goal to keep the position hedged while caputuring the theta and IV decrease while only going long OTM options for hedging, thus grabbing prmeium in little incremens each trade? Like buying the straddle and trading against it, here you are selling the straddle and hedging against it as needed?

Thanks!
More...
 
Riskarb,

I know almost nothing about options. You might say that your posts in this thread are all "greek" to me. Since I think that most trading literature in general is suspect and because I would probably not be able to discern the wheat from the chaff on anything relating to options, could you please recommend some useful reading material on the subject?
 
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