Yes, but on the call diagonals doesn't vega usually decrease as the market moves up especially if it is a strong move. Therefore, vega would seem to provide more "benefits" for put diagonals. I'm just wondering how the call diagonals and call verticals compare as the short is near to being breached.
SPX Credit Spread Trader
- Thread starter El OchoCinco
- Start date
Yes, call diagonals have the disadvantage of shrinking IV when strike is breached. That means either accepting larger losses with calls (compared with puts), or perhaps closing positions sooner.
I don't remmeber what it was like to have puts breached, but rising IV should certainly minimize losses. Might even be profitable, depending on time remaining.
Mark
Now Mark.... I am sure you had a put or two breached in your day 
Even when the short strike is breached, it doesn't mean that you are at a loss. It depends on the strike difference for the call diagonal and the time remaining.
For a put diagonal, you have a lower BE point if you opened the position at a low IV environment.
Today my call diagonal (760/800) expired with the short breached, I am sure I am fine even the market gapped up.
The mid of dec 800 is currently at around 9, and my breakeven settlement price is 768.
Interesting trade I put on yesterday.
In my quest to test out these Cross Flys and I decided yesterday to place two OTM Cross Flys on GOOG to take advantage of a large mvoe in either direction based on GOOGs earnings and also profit from an IV collpase in OCT options.
I placed a 5/10/5 OCT/NOV/DEC Cross Fly at $380 with Puts and $460 with Calls for a net debit of $1.55 or $775.
I picked those strikes after studying the premiums and potential moves for GOOG. I was quite happy to see GOOG at $458 in the after hours lol.
Well the total credit to close the entire position is around $4.60 for a very nice return. About $5.60 credit on the Calls and $1.00 debit on the Puts. there is time value premium left in the OCT $460 Calls so I will wait more towards the afternoon to close out hoping those calls lose more value since GOOG often gaps up on the earnings news and then pulls back a bit. If GOOG starts to move ITM I will close out but gonna watch to see how it moves today.
The profit is high due to the stock being right near the Call strike but there was still some room for up and down wiggle even if it was not right at $460.
Very interesting way to use these positions....
In my quest to test out these Cross Flys and I decided yesterday to place two OTM Cross Flys on GOOG to take advantage of a large mvoe in either direction based on GOOGs earnings and also profit from an IV collpase in OCT options.
I placed a 5/10/5 OCT/NOV/DEC Cross Fly at $380 with Puts and $460 with Calls for a net debit of $1.55 or $775.
I picked those strikes after studying the premiums and potential moves for GOOG. I was quite happy to see GOOG at $458 in the after hours lol.
Well the total credit to close the entire position is around $4.60 for a very nice return. About $5.60 credit on the Calls and $1.00 debit on the Puts. there is time value premium left in the OCT $460 Calls so I will wait more towards the afternoon to close out hoping those calls lose more value since GOOG often gaps up on the earnings news and then pulls back a bit. If GOOG starts to move ITM I will close out but gonna watch to see how it moves today.
The profit is high due to the stock being right near the Call strike but there was still some room for up and down wiggle even if it was not right at $460.
Very interesting way to use these positions....
Coach, you're long duration backspreads. Sure, they're going to make some money with GOOG +30 on the day. Imagine what would've happened if the stock was up less than 10 as with last qtr on a crush in vol.
This is a major change in methodology. You're going from short to long on gamma and vega. This GOOG spread was long a lot of vega, but gamma bailed you out. There wasn't any vega in those Oct, zero. In essence it was a barrier gamma sale in Oct and 3/2 vegas in Nov/Dec. You bought a lot of vega, regardless of how it played out. You gamma win and convergence gains from delta in Oct outweighed your net-vegas on the back months.
The profit is not simply due to the strike-pinning. It's the stock moving 30 handles.
This is a major change in methodology. You're going from short to long on gamma and vega. This GOOG spread was long a lot of vega, but gamma bailed you out. There wasn't any vega in those Oct, zero. In essence it was a barrier gamma sale in Oct and 3/2 vegas in Nov/Dec. You bought a lot of vega, regardless of how it played out. You gamma win and convergence gains from delta in Oct outweighed your net-vegas on the back months.
The profit is not simply due to the strike-pinning. It's the stock moving 30 handles.
Risk:
That was the point I was making. I chose those strikes expecting a large move in either direction towards those strikes. I played it specifically as a big move in either direction at a small cost. OTM calendars would have cost a lot more.
Also in this example the IV crush occured in the front month. The NOV and DEC months both fell slightly but are in line with each other. I believe the same thing happened last earnings announcement where the front month crashed (which is a short option month) but the back two months did not suffer any net IV drop.
The net vega of the spread combined in dollar terms was +$141 so not a huge +vega bias and NOV was not where the IV crush was going to occur. Moreover, the actual drop in IV that happened in the NOVs (from about 38% ATM to 29% occurred in both NOV and DEC, flattening out the vol skew in those months.)
That was the point I was making. I chose those strikes expecting a large move in either direction towards those strikes. I played it specifically as a big move in either direction at a small cost. OTM calendars would have cost a lot more.
Also in this example the IV crush occured in the front month. The NOV and DEC months both fell slightly but are in line with each other. I believe the same thing happened last earnings announcement where the front month crashed (which is a short option month) but the back two months did not suffer any net IV drop.
The net vega of the spread combined in dollar terms was +$141 so not a huge +vega bias and NOV was not where the IV crush was going to occur. Moreover, the actual drop in IV that happened in the NOVs (from about 38% ATM to 29% occurred in both NOV and DEC, flattening out the vol skew in those months.)
