Riskarb's combo to fly conversion journal

Thanks mo! I think "seeing how riskarb plays it" will be the only way to truly see how it plays out.



Quote from momoneythansens:

Sheesh, I really have to learn to stop jumping all over other people's journals lol.

I'm no expert as you know, but in response to your question...hmmm...how do I put it, I wasn't suggesting legging into each wing/vertical "individually" as movement permitted/dictated, though you could do that if you were adept at timing direction.

Rather, I would purchase the strangle outright purely taking advantage of theta/IV as you suggest i.e I wouldn't really consider delta or market movement for the purposes of purchasing the strangle unless it made the completed position untenable at which point buying back the straddle would probably be my move instead.

I don't know how riskarb intends to play it but we shall see.

As you state, at the time of conversion, if the total cost to date is less than what you would have to pay for the fly today, then job done. If you're really lucky you can get the completed fly on for "free" or better.

MoMoney.
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Quote from optioncoach:

Mo:

I did nto mean to suggest a negative gamma scalp really. I thought the intention was to sell the straddle and gain theta and perhaps IV decay, add the wings as the market moves to hedge and rebalance.

What it appears to be, in English, is to leg into the I-Fly as the underlying moves in one direction by simply buying the one side? Using risk-based haircut you get a cheap FLY compared to if you opened the whole position outright from the beginning? Thus locking in a profit on one side. If the stock reverses and moves back lower you get more wasted movement in the underlying and thus more theta....?
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Buying one side? Are you referring to put vs. call or body vs. wings? I am selling the body combo into the weekend and buying the wing combo at a future date not to exceed 10 calendar days. When/if the conversion takes place is dependent on some variables; decay, decay marking-down vols, strip vol increase/decrease, smile vol +/-, delta accumulation, etc.

There are no predictions involved; it's a shotgun approach to see how well/poorly a generic strategy will perform. I won't be trading these large, and I certainly wouldn't expect anyone else to do so.
 
Quote from Rudi_P:

Riskarb

thanks for the extension in my learning on options.
I suspect that you will always trade the near month because of theta decay. Are there conditions under which you would be prepared to go further out?

Rudi
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Trading for theta requires taking some gammas. I will stick to the front month until 2 weeks to expiration; at which point I will rolloever to the following expiration series.
 
Quote from man:

final comment. do not want to swamp off-topic. bb's database on fundamental stock sucks you down to south pole. currently buying compustat, tired of those thousands of bb databaseOperatorCleanerWhatDoIKnowWhat ...
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Yeah, I'll take your word for it. I guess it's a matter of quantity/quality. Tip of the iceberg stuff, which makes it difficult to navigate and irritating, considering the quality of the analytics.
 
What I was referring to is if you sell the XYZ $45 Straddle and teh stock moves to $49 you buy the OTM Calls to add one wing of the FLY. I guess what you are saying is that you sell the $45 Straddle and a few days later simply slap on the OTM strangle to lock in a FLY? Is it in equal numbers or ratioed in any way (more wings than body?

Since the FLY makes its max profit from non-movement in the theoretical sense, it appears you are looking to make money initial on the short straddle from decay and then slap on the wings at a lower price also due to that decay.


Quote from riskarb:

Buying one side? Are you referring to put vs. call of body vs. wings? I am selling the body combo into the weekend and buying the wing combo at a future date not to exceed 10 calendar days. When/if the conversion takes place is dependent on some variables; decay, decay marking-down vols, strip vol increase/decrease, smile vol +/-, delta accumulation, etc.

There are no predictions involved; it's a shotgun approach to see how well/poorly a generic strategy will perform. I won't be trading these large, and I certainly wouldn't expect anyone else to do so.
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Damn B,

I had already reduced my time on ET to only reading your exotics journal. Now you've just doubled my time spent, as there will now be two threads to follow. As always, looking forward to learning something new.

On a more serious note, how am I gonna get you outta the office for drink now?

Good Trading!
 
I won't be hedging with gammas, beyond the wing strike conversion. A significant loss in the body would be the result of delta and vega risk. If so, the wing strikes would be a poor addition due to peak exposures in the initial wing strikes selected. The wing strikes are a constant; in the sense that I would want to maintain symmetry on strikes. I want to trade a classic fly, no pregnant or ratio flies.

If I can't earn "building expectancy" from a decline in the wing vol debit, then I will simply offset the straddle and reallocate.
 
Quote from Arb Under Par:

On a more serious note, how am I gonna get you outta the office for drink now?

Good Trading!
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Ha, you mean leaving the family room and Blue's Clues on the wide screen? Anytime, my friend.
 
"If I can't earn "building expectancy" from a decline in the wing vol debit, then I will simply offset the straddle and reallocate."

Got ya. Thanks.

I assume the the benefits from the wing vol debit is enhanced from a decline in the body vol credit as well.
 
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