Short Strangle Swaps

[spindr0]

FTURES magazine ha
d a brief article about these, suggesting that their useful for expectations of short term IV spikes (buy near month strangle and sell more OTM further month strangle). I've seen them called double diagonals and calendar strangles. Whatever.

I've used (ratioed) reverse positions like these thru earnings but never with the intent of just chasing the IV expansion. With IV beginning to expand as much as 2-4 weeks before, I'm wondering how effective they'd be? I imagine that even tho the far month decay offset is less, a saving grace might be movement to/past a long strike. Yeh, I know, do the work and paper trade

Thoughts?

 

[wiesman02]

A short strangle swap has positive theta so you time decay is in your favor so thats a +

But isn't a short strangle swap betting on IV flattening or declining since vega is negative ? This trade would be better suited to be put on AFTER an IV pop.

Right ? Or do I have this completely reversed ?

 

[atticus]

Quote from wiesman02:

A short strangle swap has positive theta so you time decay is in your favor so thats a +

But isn't a short strangle swap betting on IV flattening or declining since vega is negative ? This trade would be better suited to be put on AFTER an IV pop.

Right ? Or do I have this completely reversed ?

Long the front month = short theta

 

[spindr0]

Quote from wiesman02:

A short strangle swap has positive theta so you time decay is in your favor so thats a +

But isn't a short strangle swap betting on IV flattening or declining since vega is negative ? This trade would be better suited to be put on AFTER an IV pop.

It's long gamma, short theta with a negative time decay. But the more I think about it, you're right. This trade makes no sense. Far month is more sensitive to IV change and a pop hurts. Gotta go read the article again.

 

[atticus]

It's a long diagonal (backspread). Best to be used prior to the ramp in vol into a "binary" event like earnings, FDA, etc. The back-month is used to recover from a potential vol-crush across the curve. Has worked in GOOG virtually every report.

 

[sle]

Quote from atticus:

It's a long diagonal (backspread). Best to be used prior to the ramp in vol into a "binary" event like earnings, FDA, etc. The back-month is used to recover from a potential vol-crush across the curve. Has worked in GOOG virtually every report.

what ratio would you put this one in, root-time vega flat?

 

[atticus]

Quote from sle:

what ratio would you put this one in, root-time vega flat?

Yeah, a bit heavy to go the conventional 1:1.

 

[newwurldmn]

Research I've done has shown that you don't generally make money from the iv spike ahead of earnings. It's really a model issue that the market has accounted for. Thats not to say that you can't find names that will work. But if think that earnings are cheap, just be long the straddle. Why would the market price one maturity right and another wrong?