VIX = SPX options' Vega?

[kapw7]

Quote from rocky_raccoon:

Speaking of 'flies. Someone showed me a strategy that is set up as follows:

On Wednesday of the expiration week (e.g. Aug 15 for August) sell next month iron fly on SPY (September) which is technically ATM but biased to the down side (OTM short call and ITM short put). The wings are $5. So the fly looks like 136/141/146, for example.

Then close the position within next 10 trading days for any profit you're comfortable with. Usually that profit averages around 10-15%. There may be notional loss in the first couple of days but then that loss goes away turning into profit.

I've tested (paper-traded) this trade twice so far and it worked as advertised. The guy who showed it to me has done some 30 trades (that is 30 months) and not a single one was a loss.

I am not sure what the proper position size is for this trade. What kind of loss may happen in 10 days? He says there will be no loss but I highly doubt that.

What is the logic of this trade? There is a premium b/c of higher demand from traders who roll their position to the next month?

 

[rocky_raccoon]

Quote from kapw7:

What is the logic of this trade? There is a premium b/c of higher demand from traders who roll their position to the next month?

Wednesday of the expiration week may be a day where some rolling activity starts - this is a bit of a mystery for me.

Generally, when position is open OTM put and call have different values and deltas (put is more expensive and has a higher delta). This makes the whole position delta negative. If SPY moves lower the position gains.
If SPY stays flat then time decay will produce a gain. If SPY moves higher then there is a notional loss. However, as the time goes by and SPY pulls back or stays somewhat higher but not by much time decay will produce a gain.

My guess is that SPY should stay within +/-2 of the initial price or return to the initial price within position holding period.