Vol-trading for beginners

10) Split-strike synthetics.

Synthetics are forwards. A synthetic long is a short put/long call at x. A synthetic short traded at strike x would result in a cover. A short synthetic at y is termed a box arbitrage and must be separated by a strike--hence split strike.

Long the 90 synthetic and short the 100 synthetic = long the 10 point box. Arbs look to buy the box under $10 and shorts look to sell the box over $10.

You can dissect the box as two strangles.

You're long the 90/100 box which consists of a short put/long call at the 90-strike and a short call/long put at the 100-strikes. To express the box as a pair of strangles:

Short the 90P/100C strangle (outside strangle)
Long the 90C/100P strangle (inside strangle) or "guts"

Therefore an outside strangle is equivalent to an inside strangle (less the strike diff). So an inside strangle at 19 is equal to the same-strike outside strangle at 9.

Two straddles separated by a strike = an inside and outside strangle. They are not arbs, but if you strangle two strikes (with two straddles) they trade equal (as constrained) as you're presented with a box arb.

Two strangles form a condor.

Back to single strike synthetics. Calendars at x-strike trade equal even if the price is different. Calendars struck to the forward trade equal on premium.
 
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11)Synthetics in practice

The natural and synthetics trade equal so why trade the synthetic? Microstructure. You're looking at the following 231P fly in GOOGL:

2100. 1700/2000/2600P for Jun 2021 at 265 to the buy.

You can buy the 231P fly as the natural and fill at 266 inside the NBBO of 260x268. No worries. There is no imminent assignment risk as your short strike is 100 OTM, but it's a game of inches. Maybe you want to leg into this over the weekend. You can't leg it as a natural with that 500-point ITM put leg. You can't hold any portion of that vertical without taking a substantial delta position. Here I am referring to legging a 121 fly via the iron (straddle -> strangle).

More importantly, there is no demand for the DITM put leg. It's an issue of (missed) opportunity and microstructure. Sure, the MMer realizes that the natural and the combo trade equal, but he can't quickly deconstruct the thing if he wanted to and lay off a combo.

The 1700/2000/2600 231P asym-fly can be traded as:

Short two 1700/2000 put spreads x short one 2000/2600 call spread. A combo. Trades equal.

ALWAYS DEFAULT TO TRADING OTM STRUCTURES WHEN POSSIBLE.

Don't short ITM legs if possible to avoid.

Again, I keep all of this data and I have saved four cents per contract over a year of trading (000s of thousands) AMZN and GOOGL options. Simulated. Variance on mid of the synthetic vs. the natural. The data assumes that the natural would fill at the same size as my synthetic.

My average daily var is about $30K. May seem like a lot may seem like nothing. I know that DITM legs are not truly marked in real-time and with someone like IBKR those aberrant marks (discounting your DITM long leg) may result in an auto-liquidation.
 
destriero said:
ofc, but I haven't read Taleb. He's so awkward.

The intent was to (pardon) dumb everything down and use practical scenarios. We're like a year away from that topic. Like why interpolate OTC penny strikes inside 1SD?

I don't think this thread will get deeply into sticky delta/SS. It's good to understand the mechanics of smile, but for most it will be noise, especially as it relates to trading SN (single name) vol.
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If this thread really turns into a year long guided effort / tutelage, I will fund a real account above pattern day trader limits and post updates. I was kind of in the process of doing so anyway but this feels like a sign. The only thing that’s been giving me pause was feeling like it needed to be portfolio margin level to get the required margin relief and I didn’t want to throw those eggs into the basket. I still might but I am curious to get good enough playing “small ball” and feel like o earned it
 
destriero said:
3) For those of you with less than $25,000. You will only be trading the close when opening the position. I mean that you will be entering orders to open a position in the last 30 minutes of the trading day. Yes, you will miss some reversals, etc., but you'll be on PDT restriction if you open/close in a single session x three times in a week. I think most brokers will offer a single exception if you fuck up and violate PDT. Some brokers consider each leg of a complex position, even if on a single complex ticket, as a single trade. IOW, one long fly may be considered as three trades. Trade near the close to open a position. You will be forced to carry all positions overnight so keep that in mind. This is no methcathinone daytraderrrrs chat.

"For the want of an eighth the kingdom was lost."

"If in doubt; get out."
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Would you explain why wait until the last 30 min of the trading day to enter the position? i think the last 30 minutes of trading, the vol is normally spike up a bit, so it is a good time to enter?
 
horizon said:
Would you explain why wait until the last 30 min of the trading day to enter the position? i think the last 30 minutes of trading, the vol is normally spike up a bit, so it is a good time to enter?
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You trade the close so that you won't get hit with a PDT violation if you're trading <$25K. You'll be forced to carry the trade overnight.
 
The journal is an incredible resource. We are lucky to have Destriero taking the time to put this together for us. Judging by some of the questions asked, some of the people reading this journal are clearly not putting the effort into carefully reading what’s written and actively attempting to think things through.

Most every word and example Destriero provides has great weight and many concepts are related to each other. If every reader who did not already know the subject matter Destriero is putting forth, learns and applies it to their trading, the average amount of edge gained multiplied by the number of traders over X period of time make this thread’s value astronomical. As such, we newbie traders can afford to put some effort into learning, including looking up terms and researching related concepts. It is a rare, if not a unique opportunity to learn from a exceptional, proven trader. Let’s try to not piss Destriero off. Personally, after I have exhaustedly read, reread, and spent quality time trying to think things through, would I dare approach Destriero with a question on something I didn’t understand.
 
destriero said:
More importantly, there is no demand for the DITM put leg.
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This is what I was wondering... is this GOOGL 231p just for examples sake, or a trade you'd actually open? Because the JUL21 2600 puts have 0 OI, in fact the whole chain looks illquid. What about ITM strikes with massive liquidity?

So always try to open flies with all 3 strikes OTM, this might be hard for me as I've been opening a lot of natural ATM.
 
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