Trading Volatility

[sle]

So, here we go. The idea is to discuss general analysis methods, possible structures to look at, maybe even exchange code and spreadsheets. Given that we all trade different asset classes and look at the world differently, I think it's mostly fine to exchange views on specific trades if there are some interesting features or ideas, but not to go into forecasting.

Lets keep this thread alive so we can use it as a reference or for dissing (e.g. you don;t know shit, go read the vol thread).

 

[HowardCohodas]

Thanks

 

[sle]

I will start right away with the following thought on the skew trades. Personally, if i see the market slowly trending in any particular direction, I like to buy ATM and sell the skew there. E.g. if the bonds are going up as they are doing now, I would be short higher strike calls against buying some ATM (assuming that I like the vol ratio and the risk reward).

My experience has been that trends (even the most violent ones) are usually volatile at the early stages and vol tends to die down a bit once you get out to the wings and, as an additional bonus you get to own some reversal gamma that is usually very rich.

 

[Martinghoul]

Makes a lot of sense especially in the bond example you've given. No idea if it's as appropriate to stocks and other stuff, but I guess it should be, to a degree.

 

[sle]

An interesting bit I picked up from the SLV thread - it appears that the OP is short front month ATM straddles and long back month OTM strangles in a 1:1 ratio. Personally, I would have done this root-time-vega flat, that is, found a ratio that (at least day 1) had made me flat vega / sqrt(time to expiry).

 

[newwurldmn]

wouldnt that have roughly been a 1:1 ratio?

 

[sle]

Not for ATM straddle vs OTM strangle, no. ATM straddle vs ATM straddle, yes, it's going to be almost exactly 1:1 rato

 

[weewilly]

Quote from sle:

I will start right away with the following thought on the skew trades. Personally, if i see the market slowly trending in any particular direction, I like to buy ATM and sell the skew there. E.g. if the bonds are going up as they are doing now, I would be short higher strike calls against buying some ATM (assuming that I like the vol ratio and the risk reward).

You have an edge there with a nice vol smile or forward skew. You don't see that skew ordinarily in stocks or stock indices which exhibit more of a smirk (reverse skew - higher vols down the line, lower vols up).

 

[newwurldmn]

Oh yeah. The strangle will have less vega than an ATM straddle... so less RT vol....

 

[rmorse]

With most equity options, unless there are take over rumors, I've found buying a 1x 2 call spread, when your moderately bullish, but think vol is high, works well. As the stock moves up, the otm call tends to shrink in vol faster than the atm. You'll have to be comfortable with the upside risk.

If I'm bearish, I don't like buying the 1x2 put spread. If the stock slides down, the otm put "might" expand.

Ratio spreads are great. You have to watch them over time and understand your risk. Both from vol changes and stock movement.

Btw, your not really selling the skew if you do the spread 1:1, your just entering into a spread with deltas. If you want to buy the skew, you would have to buy extra of the otm, usually in a delta neutral way. Sell the skew, sell extra of the otm delta neutral.