IV Trader, why don't you give me the stock so I can grab the actual closing prices. That will make this a lot easier. I have a hard time believing that all these prices are exactly 5.50 and 2.50 each. Thanks.
Volatility skew
- Thread starter DeltaDelta
- Start date
now why are you using sarcasm and patronizing tone again? What are you gaining by doing it ? You probably a nice guy in the real life , but you sounds so horrible here. You are the one that asked me for one sample not vise versa. Anyway , here are the next day results:
XYZ at 46
SEP 50 combo=4 (intrinsic value only for put) , gain of 1.60
OCT 47.5 call+52.5 put = 9.40 , gains of 1.60
total gains=3.20 per combo.
I might off misquote you on OCT wings prices , because I don't remember for sure(didn't use it)
You concentrate to much of HOW to take position on XYZ, while I spend most of my time by searching WHICH XYZ to trade. Ones you tray to take my approach you might start your own 4 years of winnings. I am not trying to convince you here , looks like we will keep our own opinions. Just drop the sarcasm , will you.
What sarcasm are you talking about? I am just trying to figure out if you are getting better prices selling the guts vs the strangle, thats it. It has nothing to do with your strategy or stock selection. I just want to prove a point to you that you will get more money selling the strangle vs the guts. Do you understand? That's it. I'm trying to be polite here, no sarcasm. Is it possible for you to give me a real world example with actual prices and stock symbol? I am trying to help you here, not mock you.
Thanks for your help, Mav.
I understand the fact , that pro can get another couple of cents per combo by placing better trade that I do , but that is not what will make or break my P&L on the long run. My strategy success depends on my ability to find the right candidates and accuracy of predictions of "The morning after" scenarios.
IV, I hear everything what you are saying. My only question to you is why you are deciding to sell the ITM put and call (the guts) vs the OTM put and call (strangle). That was my only question.
I do it in case if XYZ not going to move next morning(which is the worth scenario for me). then I day trade the stock between the ITM strikes while I upload my OCT options. Always worked for me and I don;t think I could have the same results by selling the wings the day before. BTW , your ABGX looks like a nice trade , unless there is some "hiding" upcoming news like pre-warning or FDA meeting.
It does. Thanks to you and Mav. Couple of observations;Quote from sle:
Not me, certainlyIn any case, the deal with long theta/long gamma position is as follows.
You can't put it up on a flat vol surface, as it is theoretically impossible. However, if you have a steep term structure of vols or/and a steep skew on the longer dates, it is possible to enter into a position like this by going short the far-dated wings and long the short-dated ats. If you are willing to take a real calendar position (i.e. 2 weeks vs 1 year), it does not take that much of a term structure to do it either.
Does that make sense to you?
1) The Vol skew needs to be huge, MASSIVE for it to work. Is this realistic in the real world ?
2) Because this is effectively a free lunch (vega can be hedged) wouldn't market forces be shorting the far dated high vol wings thereby bringing the IV down to a level where this trade wouldn't be workable ? See question 1)
Thanks.
In my world, I usually see this whan mortgage servicers come into the market and bid up the long-dated vols. The skew on the longer expiries is higher as is (they tend to be more normal then the close expiries) and if the vols are up, it is a bit of a free lunch . However, I don't see how you could hedge your short vega without changing the balance of other greeks.
Yes, the vol skew is huge and you will see quite a few of them. Yes, it's realistic in the real world. Not sure what you meant by that question.
But like I said before, it's not real in the sense that the theta is behaving the way you want it to. In other words you are not really long gamma and long theta where you will be earning theta every day while you are long gamma. What you will notice is that you will not earn any time decay premium because the volt is increasing which has the same effect as adding time to your position.
So no, this is not a free lunch, far from it actually. LOL. In order to attempt to capture this skew you are actually loading your position with huge amounts of deferred short gamma into what is likely going to be a substantial move. So once again, no free lunch, all is well with the world. LOL.
Yep, vega risk (reverse bleed) is the main problem with this position. The other problem is that you are short wings in massive amounts and can be caught with your pants down. In addition, unless you are a marketmaker, it's hard to buy the wings back at a reasonable cost when the front option runs out. I only put these on for big events (like Superbowl, World Series and Gammys).
ps. I did have a free lunch the other day, bookies paid