Vertical Spreads for Aggressive Growth

[rallymode]

Quote from Eric99:


You can increase size (Martingale) or not, but the results are good. I tried this with FOTM and it doesn't work because the ratio of loss to new credit is simply too low. With CTM, it seems to work pretty well.

Yes it is much easier to adjust a position thats running at 1:1 negative PnL to your credit received than it is to adjust a credit lost 5x. Personally, i rarely adjust losing positions, i rather take the hit and move on. In the cases that i do adjust, the new position has to perfectly match my market expectations going forward independently from the losses i had just realized. In essence, i am not even adjusting, i am taking a hit and then deciding its a great entry for another position.

I am much more likely to adjust in a volatile environment(May-June) and look to book quick profits on the first reversal than in a strong and trending environment(Aug-Sep-Oct-???).

Just my 2 cents.

 

[Eric99]

Thanks for the input. Yes, there always needs to be a 'no mas' point on Martingale. When the potential roll credit falls below a certain level (say 2 weeks from expiration), the size increase required to generate a net credit become too large. Perhaps rolling to next month, with a size decrease makes more sense. (All of this assumes no directional opinion, by the way.)

Everyone's risk parameters will be different but I'm talking about original position risk of 2-3% with room to Margingale to 10%, so that allows for 2-3 rolls. A CTM call vertical of 3% risk should yield credit of 1.5-2% of the account.

So far, my analysis doesn't like doing this with puts at all. The skew favors the calls. However, there might be an opportunity to do this strategy with narrow condors. The winning side would mitigate the debits on adjustments. You will certainly have to make more adjustments. I'm going to study this further.

 

[tplast]

rally, what do you think of the short VIX diagonals/calendars here?

DEC VBI is pricing 12 and the NOV contract is already tracking the spot very closely.

edit: I'm thinking long nov 12.5 short dec 12 calls

 

[rallymode]

Quote from tplast:

rally, what do you think of the short VIX diagonals/calendars here?

I dont like it here. You dont want to do a short calendar when vols are making lows. If you think vix will rise then buy calls or better yet, spx puts, why short all the vegas in a short calendar?

 

[tplast]

Quote from rallymode:

I dont like it here. You dont want to do a short calendar when vols are making lows. If you think vix will rise then buy calls or spx puts, why short all the vegas in a short calendar?

Thanks. Yeah, normally you want to short calendars at vol peaks but VIX calendars are weird and I see this as a low risk bet on a increase of volatility. This is my thinking (please poke holes):

buy NOV 12.5 @ 0.2 NOV VBI ~= 11
sell DEC 12 @ 1.0 DEC VBI ~= 12

So, I can sell it for 0.8 credit.

If the VIX stays below 12.5 by next Wednesday my longs expire worthless and the shorts will lose some time value. I figure I can buy them back for about 0.9 for a 0.1 loss.

If VIX increases, my longs will increase in price faster than the shorts. This is because the NOV futures are more closely correlated to the VIX (i.e they must converge towards the spot by the 14th) than the DEC contract. Now, vega is higher for the DECs, but they are already ATM so it can only decrease while the NOVs vega will increase with a rise on the VIX.

Haha, my head is spinning. I guess it I could just go long the NOV calls and risk 0.2

 

[rallymode]

Quote from tplast:

Thanks. Yeah, normally you want to short calendars at vol peaks but VIX calendars are weird and I see this as a low risk bet on a increase of volatility. This is my thinking (please poke holes):

Increased volatility where? Are you talking about an increase in SPX vols or increase in VIX vols. There is a difference. The short calendars/diagonals i have been talking up are a play on VIX vols decrease as well as tenor skew flattening not a decrease or increase in vix itself, although one doesnt hurt. There is neither skew nor high vols at the moment.

Haha, my head is spinning. I guess it I could just go long the NOV calls and risk 0.2

My point exactly. VIX vols are sitting at the yearly lows, what makes you think we go lower from here? Thus my suggestion that going short vix vega here is a poor trade. No reason for the short leg, it introduces too much risk for no reward.

 

[tplast]

Quote from rallymode:


Increased volatility where? Are you talking about an increase in SPX vols or increase in VIX vols. There is a difference. The short calendars/diagonals i have been talking up are a play on VIX vols decrease as well as tenor skew flattening not a decrease in vix itself. Neither one is present at the moment.

On the SPX, but more precisely I was thinking about an increase on the VIX itself.

My point exactly. VIX vols are sitting at the yearly lows, what makes you think we go lower from here? Thus my suggestion that going short vix vega here is a poor trade. No reason for the short leg, it introduces too much risk for no reward.

I was thinking about it as a directional bet on the VIX going up and playing the difference on sensitivity to VIX changes on the different months. But I didn't fully considered that the VIX vols increase when the VIX goes up.

Now the question is if the VIX option's vega is affected by the spot VIX vol or the vol of the corresponding future contract. If the later, the difference in vega may be offset by the fact that the front month contract is a lot more volatile.

 

[rallymode]

Quote from tplast:

On the SPX, but more precisely I was thinking about an increase on the VIX itself.

Then buy SPX/SPY puts. You could buy VIX calls if you so wish but know these have no gamma. I would not suggest shorting vix vega here which is exactly what the short calendar accomplishes.

 

[Eric99]

I'm going to steer clear of the general expectancy dust-up happening over on "SPX Credit Spreads". But I ran some expected values on CTM call credit spreads and found a net positive return. I'll throw this out there for comments:

1. CTM's on SPX, RUT. Leave to expiration. I ran current probability of expiring below short and above long. For the inbetween strike area, I computed the small loss at the midpoint of the strikes time the probability of being in that area. I got positive results of 3-8% on risk (one month spreads).
That was far better than I expected, especially since these are probability-weighted results.

2. Since I'm analyzing CTM's with rolling and/or Martingale approach, I ran a similar analysis for early exits. This time with probability of touching a certain point: the expiration breakeven. So two scenarios: market rises, exit on Exp BE at loss. Probability of touching used for expected value. Versus value of full credit received times 1 - probability of touching Exp BE. I got a slightly negative result for that test. That was worse than what I expected.

These are obviously one-shot tests, not remotely scientific, but interesting. If accurate (see health warning on accuracy) it would tend to favor Rally's 'expiration bet' approach. I'm stuggling with that zone of the CR spread where theta inverts and I would like to think of a way to remove that from the equation. There's an inflection point somewhere.

 

[rdemyan]

Cache:

Nice thread. You have a talent for clearly explaining your thoughts and opinions. Personally, I would like to do some trades more CTM, but as you pointed out in a post a month or so ago, CTM spreads generally require more oversight than FOTM.

Just curious as to your current % profit to date. I'm wondering how you fared during October.

Thanks.