What am I doing?

I haven't read this entire thread, but it's only neutral in the first moment[g-mean]. You cannot neutralize gamma with shares unless you dramatically overhedge delta. You're short the backspread and momentarily flat deltas and gammas.

The position accumulates deltas/time. IOW, the risk of a decline in the stock will hurt the short backspread as well as the stock hedge. You've no business trading this position unless YOU can answer the questions posed.

To add: the vega and gamma risk reach their nadir at the long strike, of course.

riskarb
 
The gamma risk overwhelms vega. Calc your VaR at 65 at static vols vs. your VaR at current share price at a 500basis increase in strike vols. In my head I'd imagine at least a 2x > loss from gamma/vega in that scenario.

30d verticals carry very little vega risk. Gamma kills. Vols trade to zero as expiration nears.

The stock trade is simply a first-adjustment in what will likely be a very disconcerting gamma-trade process should stat-vols > implied vols. No free lunch here -- your expectation for the forward distro needs to be accurate. Short gamma scalps aren't profitable.

riskarb
 
Highfreq, Are you trying to point out to me this position does not work at all or or you just giving examples of what can go wrong? Some of the things you mentioned in the 1st post of your were already answered previously in the thread. And if your point was the former, I can tell you from the senarios I have played out in the market real time, it has worked out more times than not.
 
Yes, I'd imagine it has a >50% hit rate... most short gamma strategies do. I am simply pointing out some structural considerations. I probably scalped 100mil shares against short backspreads in my career; so I am somewhat familiar with the position.
 
The questions you gotta ask yourself is : What if the stock jumps up 10 or 20 points tommorow. Short gamma/long theta strats work well, but hedge off your neg gamma but going long further OTM on the upside. This aint no index, watch for those 6 std moves out there to the upside that can and will happen.
Just my 2 cents.
 
Test your strategy on GOOG's gap of this week. Use April expiration for a scenario, then use a close to expiration scenario. I.e. use 4 days, if your trading plan would be to take your position of the table on the Monday before expiration. If you plan to hold it until the expiration day, try a scenario in which the gap happens the last day.

This is why I asked you about your trading plan.
Quote from WallStGolfer31:

If it went to $55 with say 10 days till exp, after holding the spread for a while, we'd have the following.

...
More...
 
Quote from cnms2:

Test your strategy on GOOG's gap of this week. Use April expiration for a scenario, then use a close to expiration scenario. I.e. use 4 days, if your trading plan would be to take your position of the table on the Monday before expiration. If you plan to hold it until the expiration day, try a scenario in which the gap happens the last day.

This is why I asked you about your trading plan.
More...


I can't find any profitable spreads for this strat on GOOG :(

I did find one for AA though!

Here it is, real time.


Buying 51 AA April 30 calls at $1.15
Selling 167 AA April 35 calls at $0.10
Selling 1680 shares of AA at 30.33


Expected profit per day of $48.30 on a net debit of $4195 (not including margin needed)


Let's see how this turn out!
 
Before opening any position you should write a trading plan. This should spell out clearly when will you close or adjust your position. This should foresee several scenarios based on the probability of price and IV changes, and function of the passing time toward expiration.

The probability of the underlying price to change with plus or minus one sigma is 68%, +/- two sigma 95%, +/- three sigma 99%. You should pick a number that you can live with.

You should also consider an adverse change in IV, at least +/- 20% of its current value, but also looking at 1 year min/max and seasonal IV changes.

A third factor you should consider is number of days to expiration: under favorable conditions do you plan to hold your position until expiration (and take the risk of a gap when all the greeks are very sensitive), or you'll close your position with 2,3,4,5 ... days before expiration?

Before opening your position you should consider all the above and maybe others. You should spell out the exact conditions under which you'll close for a loss, and based on this projected maximum risk size your position. You should also consider your absolute maximum risk, as it might happen even if its probability is infinitely small.

You should do this kind of homework for your AA position.
Quote from WallStGolfer31:

I can't find any profitable spreads for this strat on GOOG :(

I did find one for AA though!

Here it is, real time.


Buying 51 AA April 30 calls at $1.15
Selling 167 AA April 35 calls at $0.10
Selling 1680 shares of AA at 30.33


Expected profit per day of $48.30 on a net debit of $4195 (not including margin needed)


Let's see how this turn out!
More...
 
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