Riskarb's combo to fly conversion journal

momoneythansens · Jan 25, 2006

Go away for a few days and miss the whole riskarb and coach show...

Quote from riskarb:

Journal took a hit with GOOG, was flat PnL before that debacle. I blame Coach for strike selection.

I have given up playing GOOG other than long! It did look tempting to short vol end of last week though so you are forgiven.

1) Index futures hedge into book-delta, VaR. This would be traded <7d to expiration

What are you using for VaR? Are you looking at beta-weighed delta's for the hedge?

2) Index wing strike purchase concurrent with the purchase of ticker wings. Sum of marked debit risk on ticker flies = debit outlay on index wings.

Not following your thinking here.

3) Index straddles in cheap-gamma such as Dow, DIA, YM. Sum of marked debit risk on ticker flies = debit outlay on index body.

Got it, or...long gamma index flies? Effectively completing the -ve dispersion. I suppose DIA straddles are cheap enough to ignore the wings, is that your thinking?

The index replication under two and three is long the vol box; in effect, a short dispersion strategy. I don't want to complicate things, just to define.

...but the basket is was not specifically chosen for (-ve)dispersion right? Purely screened on KISS principles.

MoMoney.

riskarb · Jan 25, 2006

VaR from IB as well as in my LMT-EXPO sheet. No beta adjustments will be made. For simplicity I will simply look at the sum of my ticker deltas.

The index body was simply to contrast body from wings; I would be buying the atm index combo against the fly debit risks, marked to market. I would trade index body against ticker body, but I would be replicating flies vs. index. IOW, no index flies.

The -disp. is artifact of the entire process since I am short gamma from the outset and buying index gamma and vol. So in that respect, it's embedded in the strategy. It's a gamma trade if we use futures/gamma.

riskarb · Jan 25, 2006

VaR from IB as well as in my LMT-EXPO sheet. No beta adjustments will be made. For simplicity I will simply look at the sum of my ticker deltas.

Other than is implied by the VaR model. Only used for index futures hedge.

So in that respect, it's embedded in the strategy. It's a gamma trade if we use futures/gamma

Futures/option gamma.

El OchoCinco · Jan 25, 2006

OK new positions today:

- 6 OIH FEB $150 Straddles at $11.00 at 36.9%

-5 ACL FEB $130 Straddles at $10.15 at 39.5%

Still carrying GOOG loss as well

cnms2 · Jan 25, 2006

optioncoach,

What have you based your choice of OIH and ACL on? Are you considering these underlyings' near term price evolution too? Obviously short straddles are good plays when you forecast a stall of the price and / or a sensible drop in IV.

Quote from optioncoach:

OK new positions today:

- 6 OIH FEB $150 Straddles at $11.00 at 36.9%

-5 ACL FEB $130 Straddles at $10.15 at 39.5%

Still carrying GOOG loss as well

El OchoCinco · Jan 25, 2006

OIH has spiked in IV as the sector jumped on the latest move higher in oil. I am expecting some pullback in the IV as oil quiets down in this price range for a few days through Monday and OIH also bounces around the same price level theta-ing out some of the premium.

ACL also had an IV spike and earnings are due in about 2 1/2 weeks. I am looking for some IV pullback and decay as well with perhaps some price pause before earnings. Downside is IV contionues to expand waiting for earnings but if it pauses while waiting then I can let theta do its job and convert to a FLY with 5 trading days.

The idea for both of these a la Riskarb, is to ride some short-term IV contraction and theta and either take a profit on the short straddle or leg into the Iron Fly for as little net debit as possible or free in a best case scenario.

If the underlying makes a significant move then I would look to make more adjustments.

Quote from cnms2:

optioncoach,

What have you based your choice of OIH and ACL on? Are you considering these underlyings' near term price evolution too? Obviously short straddles are good plays when you forecast a stall of the price and / or a sensible drop in IV.

IV_Trader · Jan 25, 2006

Quote from optioncoach:

OIH has spiked in IV as the sector jumped on the latest move higher in oil. I am expecting some pullback in the IV as oil quiets down in this price range for a few days through Monday and OIH also bounces around the same price level theta-ing out some of the premium.

ACL also had an IV spike and earnings are due in about 2 1/2 weeks. I am looking for some IV pullback and decay as well with perhaps some price pause before earnings. Downside is IV contionues to expand waiting for earnings but if it pauses while waiting then I can let theta do its job and convert to a FLY with 5 trading days.

The idea for both of these a la Riskarb, is to ride some short-term IV contraction and theta and either take a profit on the short straddle or leg into the Iron Fly for as little net debit as possible or free in a best case scenario.

If the underlying makes a significant move then I would look to make more adjustments.

I think you will do OK on ACL , the iv is already above the pre-report top of 35. Report is on 2/8

momoneythansens · Jan 25, 2006

Phil,

What's your position sizing approach for these? riskarb has suggested 2 lots per 10K which sounds fairly sensible to me. Are you taking a different approach?

EDIT: I see you've also gone slightly bullish on the OIH combo. Though I don't know when you put it on. Reasons? Not worried about skew issues?

MoMoney.

Quote from optioncoach:

OK new positions today:

- 6 OIH FEB $150 Straddles at $11.00 at 36.9%

-5 ACL FEB $130 Straddles at $10.15 at 39.5%

Still carrying GOOG loss as well

El OchoCinco · Jan 25, 2006

I am basically using a 5 contract approach but in line with $75K max margin amount for all positions, i.e. margin required for each straddle totaled up. So converted GOOG, ACL and OIH and any others at no more than $100K margin total (obviously the GOOG position no longer counts against margin).

This will keep my number of open positions small. Right now both these positions are about $50,000 in required margin. So if I add more positions I may have to do less contracts per position depending on what my total margin requirements are. Remember it does not mean $75K risk per se. I can roll out into a limited risk position anytime to cut the loss down to a minimum compared to the margin and the diversification of positions into 3 or 4 will help balance al of them combined. Even if a black swan event hits all 3 or 4, I can still get out with a limited loss compared to the margin. My cut off is $10K in losses at anytime combined.

I basically want to try these in small bunches and get a feel for them.

EDIT: I wanted to grab the nearest strike on OIH and got in when it was at $149 so went for the $150 strike. I do think there is some pullback possible but see it possibly bouncing around a bit near the $150 mark after the sharp breakout from $144. If it moves back to $145 and hovers there then I should still be alright.

Quote from momoneythansens:

Phil,

What's your position sizing approach for these? riskarb has suggested 2 lots per 10K which sounds fairly sensible to me. Are you taking a different approach?

MoMoney.

boze_man · Jan 26, 2006

since we r talkin bout combos...

how bout a simple ratio spread (skew it toward your directional bias), the ratio is basically an incomplete fly...then later buy the other wing and convert to a fly if needed?

maybe work better on some of these stocks (goog, etc)

any thoughts?