YM -- shorting the 9800//10200 put backspread

R

riskarb

Hi Guys,

I've been selling the YM 9800//10200 Apr put backspread at a small credit today -- 2x5:

BOT 2 YM APR 10200P
SEL 5 YM APR 9800P

300bp in volty skew; an excellent +expectancy, and increasing deltas as we approach expiration. It doesn't start to accumulate gammas until we trade to the short strike, so I'll likely place stops on the position if we trade below 9800 on YMM4.

I'll pull half the position if it trades to a $.40 debit, letting the remaining ride until expiry or a trade to the short strike at YM=9800.

Best,
riskarb
 
Quote from riskarb:

Hi Guys,

I've been selling the YM 9800//10200 Apr put backspread at a small credit today -- 2x5:

BOT 2 YM APR 10200P
SEL 5 YM APR 9800P

300bp in volty skew; an excellent +expectancy, and increasing deltas as we approach expiration. It doesn't start to accumulate gammas until we trade to the short strike, so I'll likely place stops on the position if we trade below 9800 on YMM4.

I'll pull half the position if it trades to a $.40 debit, letting the remaining ride until expiry or a trade to the short strike at YM=9800.

Best,
riskarb
More...

Thanks for the idea. I like the trade a lot, although I'm bullish enough that I'd write something higher.
 
Quote from Pabst:

Thanks for the idea. I like the trade a lot, although I'm bullish enough that I'd write something higher.
More...

Agreed -- I liked the fact that I had some decent short delta potential for a credit-trade in naked short puts. Vols were 16x19 when I put it on, still are.

I would've traded the 10300x9900, but I've got a decent credit in $terms and I'm not convinced the market holds gains on events in Afghanistan.

Anyway, hope you're in some as well, Pabst. Think it's a decent play and the market will still let you in the trade at a dent vol-edge.

riskarb
 
Quote from riskarb:

Hi Guys,

I've been selling the YM 9800//10200 Apr put backspread at a small credit today -- 2x5:

BOT 2 YM APR 10200P
SEL 5 YM APR 9800P

300bp in volty skew; an excellent +expectancy, and increasing deltas as we approach expiration. It doesn't start to accumulate gammas until we trade to the short strike, so I'll likely place stops on the position if we trade below 9800 on YMM4.

I'll pull half the position if it trades to a $.40 debit, letting the remaining ride until expiry or a trade to the short strike at YM=9800.

Best,
riskarb
More...

Hey Arb,

Nice looking trade. 2 quick questions, if you don't mind. First, assuming your expected move down isn't imminent, how about converting to a 2:5:3 long fly once the 9400's can be bought for peanuts? The profit range would be virtually unchanged with downside risk nearly eliminated. Now if the expected break is in fact swift, would you expect the skew to compensate for the overall rise in implieds? Thanks.

HD
 
Quote from Hello_Dollars:

Hey Arb,

Nice looking trade. 2 quick questions, if you don't mind. First, assuming your expected move down isn't imminent, how about converting to a 2:5:3 long fly once the 9400's can be bought for peanuts? The profit range would be virtually unchanged with downside risk nearly eliminated. Now if the expected break is in fact swift, would you expect the skew to compensate for the overall rise in implieds? Thanks.

HD
More...

Hi HD -- Sure, I'll likely cover to the fly once(if) the wing gets cheap. I'm not a huge-fan of non-classical flys/condors as the p&l is asymmetric.

w.r.t. the skew... the long puts may see a declining volty, but so may the short puts as well, due to "skew drift" in the short puts(becoming atm). The initial delta position is more of an issue currently. There is a lot at work here; the large strike range, initial delta, decay, long strike otm, etc...

riskarb
 
Hi riskarb.
When you mean skew drift do you mean the tendency of the skew to shift because of the movement in the underlying?
Ex. A strike has 30IV ,
B strike has 28 and
C has 29 with B being the ATM strike.

If underlying rallies to C, B is now around 30 and C being the new ATM now has the lowest IV? Thanks
 
Quote from GATrader:

Hi riskarb.
When you mean skew drift do you mean the tendency of the skew to shift because of the movement in the underlying?
Ex. A strike has 30IV ,
B strike has 28 and
C has 29 with B being the ATM strike.

If underlying rallies to C, B is now around 30 and C being the new ATM now has the lowest IV? Thanks
More...

GA, I don't want to speak for Arb, and goodness knows he can explain this a lot better than me, but what I think he's referring to is the tendency for the volatility skew seen most prominently in various index options to propagate itself throughout the chain as the underlying moves around. Hence, while IV is unlikely to stay constant, the current ATM vol will typically shift to whichever strike subsequently becomes ATM, with other vol levels shifting accordingly.
 
Quote from Hello_Dollars:

GA, I don't want to speak for Arb, and goodness knows he can explain this a lot better than me, but what I think he's referring to is the tendency for the volatility skew seen most prominently in various index options to propagate itself throughout the chain as the underlying moves around. Hence, while IV is unlikely to stay constant, the current ATM vol will typically shift to whichever strike subsequently becomes ATM, with other vol levels shifting accordingly.
More...

Exactamundo!

riskarb
 
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