what is the best way to trade skew while hedging delta, gamma, vega, and theta?

My goal is to find out the most efficient way to express a view on skew. Say if I expect the skew to get steeper from 5 vol points to 6 vol points, not the overall shift of vol surface. These two things (steepening of skew and the elevation of vol) of course are correlated (correlation at about 0.4).

Since folks bring it up, here is my thought about trading both skew and vol with options simultaneously:

a. if you expect vol level to go up, you buy strangle (1 30 detla OTM put + 1 30 detla OTM call)

b. If you expect skew to get steeper at the same time, you long 5 30 detla put short 5 30 detla call and long 300 underlying (to zero out delta) trade

So if you combine two a and b, the overall positions become

c. long 6 30 delta OTM put + short 4 30 delta OTM call + long 300 shares of underlying.

My thought is that there is a vol trade and there is a skew trade. They are correlated but not the same thing. You can trade them both at the same time.

I apologize that that the post is a little too long.

njrookie
 
(flattener) short the put backspread with strikes as wide as will allow a spread credit while going long the ATM put. You lose on curve as soon as you trade ITM, anyway. Or gamma trade the R/R.

If it were easy there would be no smile.
 
Atticus,

Thanks for the response. I have a statistical model that forecast imp vol level and skew. This provides the basis to put on the trade. Converting the vol / skew forecast to an efficient trade is where I am struggling.

I need a bit more time to think through about the trade you suggested.

njrookie
 
Or like so many others this thread in the options forum is another example of taking risks that you don't need to take. Why worry about these? It's not like if you hedged them out you'll make more money. In fact, you'll probably make less, and even if you wanted to know these greeks I posit the only ones to pay attention to wrt hedging is only delta and theta but primarily delta. Theta is only a concern if you don't pay up for it, and as far as delta none of the other greeks will tell you anything about which direction the underlying might move or in what proportion, which is far more important to know than whether vega is too high or any other greek that seems imbalanced and needs to be hedged.

Trust me, use theta and delta to hedge only. You don't need to hedge vega unless you're trading leaps or theta is large compared to your shorter term trades in options if your timeframe's short enough to warrant worrying about the possibility of expiration.
 
Quote from bwolinsky:

Or like so many others this thread in the options forum is another example of taking risks that you don't need to take. Why worry about these? It's not like if you hedged them out you'll make more money. In fact, you'll probably make less, and even if you wanted to know these greeks I posit the only ones to pay attention to wrt hedging is only delta and theta but primarily delta. Theta is only a concern if you don't pay up for it, and as far as delta none of the other greeks will tell you anything about which direction the underlying might move or in what proportion, which is far more important to know than whether vega is too high or any other greek that seems imbalanced and needs to be hedged.

Trust me, use theta and delta to hedge only. You don't need to hedge vega unless you're trading leaps or theta is large compared to your shorter term trades in options if your timeframe's short enough to warrant worrying about the possibility of expiration.
More...

WHAT THE FUCK. "You'll probably make less" which defines a hedge.... make less when right, lose less when wrong.

You are so out of your depth it's ridiculous. You aren't nuts, you're retarded.
 
Quote from njrookie1:



a. if you expect vol level to go up, you buy strangle (1 30 detla OTM put + 1 30 detla OTM call)

b. If you expect skew to get steeper at the same time, you long 5 30 detla put short 5 30 detla call and long 300 underlying (to zero out delta) trade

So if you combine two a and b, the overall positions become

c. long 6 30 delta OTM put + short 4 30 delta OTM call + long 300 shares of underlying.

My thought is that there is a vol trade and there is a skew trade.
More...
It's a modest skew trade because you have 2 more long puts than short calls, assuming little price change.

The more the IV rises, the more flatness you lose b/t the strikes and its shape starts to approach the slope of a long put position. I blieve this would apparent if you model the position and vary the IV.
 
Quote from atticus:

WHAT THE FUCK. "You'll probably make less" which defines a hedge.... make less when right, lose less when wrong.

You are so out of your depth it's ridiculous. You aren't nuts, you're retarded.
More...


Just tell him which trades to make. Don't fiddle with numbers to confuse the noob more.

Like the guy who thought there was unlimited upside in buying a call on a leveraged inverse ETF and selling a call at a higher strike?

Gee, I wonder where that one is.
 
Quote from bwolinsky:

Trust me ...
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All right, dude. Why don't you go back to the vanity thread while adults here are talking about real life, such as trading skew? I am sure people here are starting to get tired of the whole "I know it all act".
 
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