SPX OTM calls IV crush

taowave said:
Off the top of my head,I dont believe you make any "real money" trading the ATM/25 D 1x2 backspread in a crash. Yeah,the OTM strikes picked up more than the rest of the smile,but they lost vega as the market cratered,while the pre crater 25D put blew up,had real vega plus your gamma kicked in..Thats the home run..

Think about it,in a crash would you rather be short futures,long 25 delta calls,or long futures 25 delta puts??

Yeah the smile went your way, its nice on a graph,but those little 25D pre crash calls are simply overpriced wings at that point that have picked up 10-15 vol handles but not much in absolute dollars.Its the pre crash 25D puts that buy you the Ferrrari..

As you can see,I dont love 1 x 2 ATM/.25D call backspreads in the SPX:)
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Agreed. But I thought we were just talking about the OTM calls in this thread. Of course the OTM puts, no matter how steep the skew is, are a much better buy than even the cheapest IV OTM calls when the market crashes and the VIX goes from 20 to 80+.

But the 1X2 (1 ATM, 2 OTM calls DN) backspread always makes money when the market moves away (goes lower) from it and the curve flattens. If you do enough of them, especially on longer-dated expirations, you can get both the Ferrarri Stradale and the Porsche 911 Turbo S as your everyday "beater".
 
LOL!!! My apologies,i misinterpreted what you wrote..

My issue is,in a world where the market goes down for a nanosecond and then rebounds every F-ing time,I never make the money I anticipated on ATM backspreads..With that said,maybe i should start expanding my horizons and look at the longer dated options....

I recently moved from Sag Harbor to Vermont..Im thinking the Ferrrari Stradale may be a bit much for the everyday beater:)
 
gowthamn said:
Yes the IV was good enough last Thursday and Friday. This week is fell a lot relative to 50 Delta.

I have also seen the OTM maintain good IV if the market aggressively goes up too. But if the market is just trading sideways, the OTM falls

Could this be happening because of FED meeting today?
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Sideways trading will destroy the IV of those calls, especially if the market is rangebound post-Fed meeting. Big violent rallies, like the 10% up days we saw back in March will keep those calls bid, but as soon as the SPX settles in a range after a big rally, they will destroy those calls, as well as any other option IV on the smile.

You'll need a disappointing Fed meeting with a bearish market reversal for those calls to catch a bid. Any talk of the Fed eventually undoing its aggressive rate cuts in March, or limiting its credit market QE program, will help change the persistent positive market sentiment and make the IV of those OTM calls explode on an unexpected break in the stock market.
 
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taowave said:
Off the top of my head,I dont believe you make any "real money" trading the ATM/25 D 1x2 backspread in a crash. Yeah,the OTM strikes picked up more than the rest of the smile,but they lost vega as the market cratered,while the pre crater 25D put blew up,had real vega plus your gamma kicked in..Thats the home run..
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It's interesting that both of us (you're an an EQD trader too, I recall) dismissed the idea, for similar reasons and off the top of our heads. I did so when I was walking the dog last night and I was VERY baked, so that's my excuse :)

This morning, I actually priced Dec 50d/25d c1x2 as of Feb 20 and Mar 20 - it would have done quite well. Not Ferrari well, but it would have been a solid Lexus trade. This said, the attribution is primarily due to long vega and gamma on the 25d - it was not really a skew trade, as it was long both vega and gamma at inception. The long leg dominates, so I can say I had the "same" trade on by being long tied Sep 3450 calls (paid 12.2 vol for them in Jan).
 
VolSkewTrader said:
You would have been long gamma starting out. The 2 lower IV OTM 25 delta calls are more gamma rich than the higher IV ATM. That's called skew theta. On the way down you probably would have been slightly long to flat gamma. And you would have been long vega the whole way down. Further OTM calls have more volga/vomma (vega convexity) than ATMs (which have zero vomma). That's a homerun trade that would have landed you at the Ferrari dealership.
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Hum, you don´t work for the vol desk of Gold-man´s, do you? :D

Wait, you are too clever for that desk...Susqehanna? IMC? Flow Trader?
 
Nighthawk said:
Hum, you don´t work for the vol desk of Gold-man´s, do you? :D

Wait, you are too clever for that desk...Susqehanna? IMC? Flow Trader?
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Nah. I could never work for someone or be an employee of a big firm or corporation. I like to control my own destiny, and be fully responsible for all my winners and losers.
 
Same Lazy Element said:
It's interesting that both of us (you're an an EQD trader too, I recall) dismissed the idea, for similar reasons and off the top of our heads. I did so when I was walking the dog last night and I was VERY baked, so that's my excuse :)

This morning, I actually priced Dec 50d/25d c1x2 as of Feb 20 and Mar 20 - it would have done quite well. Not Ferrari well, but it would have been a solid Lexus trade. This said, the attribution is primarily due to long vega and gamma on the 25d - it was not really a skew trade, as it was long both vega and gamma at inception. The long leg dominates, so I can say I had the "same" trade on by being long tied Sep 3450 calls (paid 12.2 vol for them in Jan).
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And you want to have the exact opposite (Long 1 ATM / Short 2 25d Calls) on the way back up....like how we've been slowly rallying the past few weeks with VIX getting crushed. Probably an even bigger winner when market slowly rallies to your 2 shorts.
 
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