riskarb's trading journal

[riskarb]

Quote from optioncoach:

What is the reversal part of the trade if you do not mind me asking. It looks like a long call financed by the sale of a naked put. Is there an expected follow up move or adjustment?

Simply terminology:

Long otm put / short otm call = risk conversion [short synth/implied long natural]
Long otm call / short otm put = risk reversal [long synth/implied long natural]

The terms reflect the synthetic-side of a 3-way conversion arbitrage. The split-strike adds convergence-risk, hence the "risk" term. Obviously no natural long or short is used, but the terminology stuck. It's simply a long or short split-strike synthetic.

Most generically refer to both as "risk reversal", long or short.


No follow-up, other than an offset. It's simply a long bet.

 

[Cache Landing]

Quote from riskarb:

Yes, as any directional or vol forecast is based upon daily-bar analysis -- I don't want to hold the wings too long w/o converting. I will buy the deferred wings as the opener if I am predicting a rise in vol, or a lower index print.

Lost you on the index print part. I thought I undertood the term, but it wouldn't make sense the way I understand it.

 

[riskarb]

Quote from Cache Landing:

Lost you on the index print part. I thought I undertood the term, but it wouldn't make sense the way I understand it.

A bear move in the index

 

[Cache Landing]

Quote from riskarb:

A bear move in the index

That's the way I understood it, but if you're long the strangle wouldn't any move be ok? Or are you referring to the idea that a bear move usually results in a rise in vols, while the bull move has the opposite effect?

 

[momoneythansens]

Quote from riskarb:

I don't want to hold the wings too long w/o converting.

You mean straddle here not wings right?

 

[Cache Landing]

Quote from momoneythansens:

You mean straddle here not wings right?

That's what I assumed.

 

[momoneythansens]

Quote from riskarb:

Simply terminology:

Long otm put / short otm call = risk conversion [short synth/implied long natural]
Long otm call / short otm put = risk reversal [long synth/implied long natural]

The terms reflect the synthetic-side of a 3-way conversion arbitrage. The split-strike adds convergence-risk, hence the "risk" term. Obviously no natural long or short is used, but the terminology stuck. It's simply a long or short split-strike synthetic.

Most generically refer to both as "risk reversal", long or short.


No follow-up, other than an offset. It's simply a long bet.

It's possible to complete the reversal by going short underlying here once you have gained on the synthetic to lock it in - is this not worth it? Or does the convergence risk overwhelm the lock. Obviously it's not a true lock due to the split-strike synthetic.

Your trade could become a big winner through the combination of skew flattening and long deltas if we rally.

How does this work the other way around? e.g. short split-strike synthetic as per earlier trade. It seems you're purely relying on deltas there.

MoMoney.

 

[riskarb]

Quote from Cache Landing:

That's what I assumed.

No, long wings of a time fly if buying the vol to open the position -- selling the body at a later date. I normally sell the body as the initial trans.

 

[riskarb]

Quote from momoneythansens:

It's possible to complete the reversal by going short underlying here once you have gained on the synthetic to lock it in - is this not worth it? Or does the convergence risk overwhelm the lock. Obviously it's not a true lock due to the split-strike synthetic.

Your trade could become a big winner through the combination of skew flattening and long deltas if we rally.

How does this work the other way around? e.g. short split-strike synthetic as per earlier trade. It seems you're purely relying on deltas there.

MoMoney.

It's not a reversal at that point, it's a collar. The split strike negates any possibility of arbitrage.

Yes, I prefer to buy the synthetic in index due to the +theta at neutrality. Normally I would do 2x the size in the long synth // short synth, assuming = confidence seen in the signal.

 

[riskarb]

Quote from riskarb:

Long delta risk-reversal:

Short 50 SPX Jun 1250p
Long 50 SPX Jun 1280c

SPX:1261
ES: 1264

50 x ($1.70) to the sell


Edit: The intent is "sell" the position [market] at a debit on a rally. The position is long the market at a $-credit.

Sold the long reversal at $3.80 debit, gain of $5.50 on 50.


Gain of $27,425
Prior booked PnL $20,850
Blotter PnL from inception of journal: $48,275, 4.8%


[journal blotter 3]