Controversial Option Discussion Of The Day - Calls and Puts

[cutz]

Wow mazza a quant, explains why you're always on the ball.

Actually dynamic hedging ( hence the book ) is what i'm having trouble with.

But as you suggested trading is the best teacher so shortly i'll have a go at some dynamic techniques rather than relying solely on heavy wings, not to say that i haven't been happy with my trading so far, just gotta get comfortable using SPI futures and other markets, Eurex is what i'm working towards ( decided this yesterday ).

 

[mazzatelli1000]

LOL I can assure you I am one of the sh*ttier ones out there HAHA

Taleb's book will give you ideas.
I also recommend Cottle's forum, there are some hedges/adjustments that are discussed real time which are useful.

I have successfully derailed this thread as well.
Sorry Wayne :hide:

Controversial topic of the day
"If HV > IV, options are cheap - buy them
If IV > HV, options are expensive - sell them"
:sleeping:

 

[wayneL]

LOL I can assure you I am one of the sh*ttier ones out there HAHA

Taleb's book will give you ideas.
I also recommend Cottle's forum, there are some hedges/adjustments that are discussed real time which are useful.

I have successfully derailed this thread as well.
Sorry Wayne :hide:

Controversial topic of the day
"If HV > IV, options are cheap - buy them
If IV > HV, options are expensive - sell them"
:sleeping:

It's all good Mazza. The goal is to help each other. As long as that's happening, let the conversation go where it will.

Re HV:IV - I like that question, hope we get some good goes at it.

 

[Grinder]

Controversial topic of the day
"If HV > IV, options are cheap - buy them
If IV > HV, options are expensive - sell them"

I don't see it as a hard & fast rule, just another indicator. What really is cheap or expensive? If you look at the VIX it shows options are very low in relation to recent IV levels but could also been considered still relatively high compared with past levels. So would you sell em or buy em?

 

[wayneL]

I don't see it as a hard & fast rule, just another indicator. What really is cheap or expensive? If you look at the VIX it shows options are very low in relation to recent IV levels but could also been considered still relatively high compared with past levels. So would you sell em or buy em?

Buy or sell is beside the point. Whether nett long or short theta, do you want to be long or short vega?

 

[Grinder]

Buy or sell is beside the point. Whether nett long or short theta, do you want to be long or short vega?

Might be drifting off topic here, but I like short vega plays when my view of IV is high & being close to vega neutral in times like this.

 

[wayneL]

Might be drifting off topic here, but I like short vega plays when my view of IV is high & being close to vega neutral in times like this.

Sounds reasonable to me. Punting on vega is certainly a bit more uncertain than usual at the moment.

 

[Grinder]

Wayne, Mazza & Co, maybe someone can throw me a bone with something that was touched on earlier in this thread.

Iv'e been using static hedging in the form of smaller CTM debit spreads to support my delta neutral ICs as a form of built in insurance. This has worked to somewhat mild success in more volatile times but more often than not has cut a deep wedge out of my profit in calmer times. Alternatively, adjusting positions as I go by rolling, cutting delta & picking up puts/calls at certain strikes has faired well but is not a an exact science to me.

Whats your take on these 2 methods?

 

[Tradesurfer]

The points earlier about the whole long or short vega/IV reminded me of a couple months ago as I think both of you have pointed out that its not a hard and fast rule. i think put i/v was much higher than call I/V some stocks that let me put on some nice sythetic time long positions. Pretty much financed all of the long call and in many cased collected a credit because of the skew.

I attached a chart for some discussion of 30 day I/V of puts and calls on the options on the VIX. Now offcourse with a floor of 0, we would naturally see the call I/V higher at lower VIX readings, but in a non scientific study(eyeballing the I/V call/put chart) there is some dicussion to be had about buying calls on the VIX when I/V is a) showing a big gap between, and b) when I/V is spiking.

Vice versa for when the puts are on top. When Puts reach a highest high in I/V buy puts.

Anyway, check out the chart and wouldn't mind some banter on the subject.

cheers

Derek

 

[wayneL]

Wayne, Mazza & Co, maybe someone can throw me a bone with something that was touched on earlier in this thread.

Iv'e been using static hedging in the form of smaller CTM debit spreads to support my delta neutral ICs as a form of built in insurance. This has worked to somewhat mild success in more volatile times but more often than not has cut a deep wedge out of my profit in calmer times. Alternatively, adjusting positions as I go by rolling, cutting delta & picking up puts/calls at certain strikes has faired well but is not a an exact science to me.

Whats your take on these 2 methods?

Grinder,

some specific examples would be good, just to make sure we're on the same page.

 

[wayneL]

The points earlier about the whole long or short vega/IV reminded me of a couple months ago as I think both of you have pointed out that its not a hard and fast rule. i think put i/v was much higher than call I/V some stocks that let me put on some nice sythetic time long positions. Pretty much financed all of the long call and in many cased collected a credit because of the skew.

I attached a chart for some discussion of 30 day I/V of puts and calls on the options on the VIX. Now offcourse with a floor of 0, we would naturally see the call I/V higher at lower VIX readings, but in a non scientific study(eyeballing the I/V call/put chart) there is some dicussion to be had about buying calls on the VIX when I/V is a) showing a big gap between, and b) when I/V is spiking.

Vice versa for when the puts are on top. When Puts reach a highest high in I/V buy puts.

Anyway, check out the chart and wouldn't mind some banter on the subject.

cheers

Derek

Derek

I'm not quite sure what we're looking at there. If it's what it says it is, I see only massive arbitrage opportunity... i.e. never mind buying puts or calls, conversions and reversals with massive guaranteed profits.

Hence, I can't come to grips with what you're showing us. These sorts of things are arbed off well before us retail schmucks even know they're there.

 

[Tradesurfer]

Yeah sorry if it wasn't that clear. So I basically pulled a chart of the options Implied Volatility on the VIX index.

I then set the chart to show me or break apart and show individually what the 30day implied vol is on puts and on calls.

Probably not what you were asking me but figured I'll through in there anyway.

So since the VIX implieds go up when the index gets away from the mean sort of, most options buyers are buying say puts when the VIX is way up and calls when it is very low.

So in this case, rather than the whole IV>HV sell options etc-actually might be a signal to put the options with the highest implied when the implied volatility on that side reaches a new high. Starting to see the VIX settle down and the implied vol on the call side is spiking again and the seperation between put/call IV is or has a large gap again.

Like I said I have't tested with real data, but food for thought.

For those worried about IV going down maybe spread the position off. So calld debit right now to be a little more vega neutral.

Just another way to look at VIX rather than buy equities at a new VIX peak or shorting equities at VIX peak lows, buy the VIX options on the Future and using the IV Call/Put graphs to point to which side to take

 

[Tradesurfer]

I was trying to find a chart with the Vix itself also in there with line so we could see what happened to it and how much intrinsic value one might have picked up but if you can look at the chart I posted next to a Vix chart

 

[Grinder]

a couple of hypotheticals will have to do for now. A little tricky to give all possible examples but heres a couple below.

I open up this position below 45 -65 days from expiry for a credit:

SP 400
BTO 10 510 XYZ SEP CALL
STO 10 500 XYZ SEP CALL
STO 10 300 XYZ SEP PUT
BTO 10 290 XYZ SEP PUT

Static hedge might be:(obviously for a debit)
STO 3 480 XYZ AUG CALL
BTO 3 470 XYZ AUG CALL
STO 3 320 XYZ AUG PUT
BTO 3 330 XYZ AUG PUT

or Static hedge might be used to offset short vega:(obviously for a debit)
BTO 2 500 XYZ OCT CALLS
STO 2 490 XYZ SEP CALLS
STO 2 310 XYZ OCT PUTS
BTO 2 300 XYZ SEP PUTS

As opposed to managing the IC position on the go if short strikes are under threat, such as rolling part of the original IC up/down in stages whilst adding single calls/puts to spread the delta around, or maybe even a few debit spreads or calanders to mitigate losses as I go.

Im getting much better as adjusting on the move but still like the added comfort of built in protection.

Suggestions are welcome.

 

[mazzatelli1000]

I was trying to find a chart with the Vix itself also in there with line so we could see what happened to it and how much intrinsic value one might have picked up but if you can look at the chart I posted next to a Vix chart

Ah, I see this is implied vol of the VIX options - i.e. vol of vol
I guess if you believe that the VIX is a good indicator of realised vol then you could use this.

But to be honest I am not very familiar with trading the VIX other than looking at the spread between the VIX and S&P500 stat vol.

 

[mazzatelli1000]

a couple of hypotheticals will have to do for now. A little tricky to give all possible examples but heres a couple below.

I open up this position below 45 -65 days from expiry for a credit:

SP 400
BTO 10 510 XYZ SEP CALL
STO 10 500 XYZ SEP CALL
STO 10 300 XYZ SEP PUT
BTO 10 290 XYZ SEP PUT

Static hedge might be:(obviously for a debit)
STO 3 480 XYZ AUG CALL
BTO 3 470 XYZ AUG CALL
STO 3 320 XYZ AUG PUT
BTO 3 330 XYZ AUG PUT

or Static hedge might be used to offset short vega:(obviously for a debit)
BTO 2 500 XYZ OCT CALLS
STO 2 490 XYZ SEP CALLS
STO 2 310 XYZ OCT PUTS
BTO 2 300 XYZ SEP PUTS

As opposed to managing the IC position on the go if short strikes are under threat, such as rolling part of the original IC up/down in stages whilst adding single calls/puts to spread the delta around, or maybe even a few debit spreads or calanders to mitigate losses as I go.

Im getting much better as adjusting on the move but still like the added comfort of built in protection.

Suggestions are welcome.

It looks like you're building a nuclear bomb shelter
IMO, you seem heavily overhedged.

Dissection is messy - you have long and short calendars and various strikes [290,300,500,510] and a front month condor from 300-500. A large move would still yield some heavy losses.
What is the usual R:R on these trades [if you don't mind me asking]

I'd imagine adjustments are made based on looking at the risk graph?
Personally I would decline to have shorts that far OTM.
BTW if it ain't broke, don't fix it

 

[Grinder]

I adhere to the 'if it ain't broke, don't fix' philospohy', but am always looking at more efficient ways to go about doing things. Take no notice of the actual strikes, they are all ficticious. Thought I'd throw up a replica of an IC with the debit & calander set ups just to explain what I'm thinking.

So back to.. am tossing up between static hedging & just adjusting the IC as I go, difficult to explain as it all depends on my view at the time & what the market throws at me as to how I would adjust. Suppose all I'm after is some feedback on whether other traders go with built in protection or adjusting during play?

It looks like you're building a nuclear bomb shelter
IMO, you seem heavily overhedged.

LOL Mazza, like to play on the safer side, but is tends to be costly.

 

[cutz]

Controversial topic of the day
"If HV > IV, options are cheap - buy them
If IV > HV, options are expensive - sell them"
:sleeping:

I tend to ignore HV, perhaps at my peril, rely only on IV where it's been and where it's at.

 

[wayneL]

I adhere to the 'if it ain't broke, don't fix' philospohy', but am always looking at more efficient ways to go about doing things. Take no notice of the actual strikes, they are all ficticious. Thought I'd throw up a replica of an IC with the debit & calander set ups just to explain what I'm thinking.

So back to.. am tossing up between static hedging & just adjusting the IC as I go, difficult to explain as it all depends on my view at the time & what the market throws at me as to how I would adjust. Suppose all I'm after is some feedback on whether other traders go with built in protection or adjusting during play?



LOL Mazza, like to play on the safer side, but is tends to be costly.

Well my approach with ICs etc is this.

Agree with Mazza there. For me, messy and still risk if the market starts to boogie.

If there is some very clear statistical probabilities, not just probs based on volatility, and I can get premium for the strike, I'll write one side of the IC large and add the other side to neutralize delta if I feel I need to.

Otherwise I'll write a low probability IC (perhaps starting with an Iron Butterfly and add more IBs to morph to the IC) and delta hedge OFTEN as I go along. The thing with delta hedging short gamma is that you lock in losses, (the reverse of long gamma scalping), so I'd prefer to pay commissions than pay for delta.

I might start with, or add some double diagonals or calendars for the vega if necessary.

The end payoff can be substantially different to what I started with.

That's how I prefer to do it.

 

[Grinder]

Well my approach with ICs etc is this.

Agree with Mazza there. For me, messy and still risk if the market starts to boogie.

If there is some very clear statistical probabilities, not just probs based on volatility, and I can get premium for the strike, I'll write one side of the IC large and add the other side to neutralize delta if I feel I need to.

Thanks heaps Wayne, always nice to know how others go about it.

I mostly do high prob ICs & always look to adjust way before any pain sets in, this usually takes the form of adding deltas in the form of calanders or debit spreads.

Your approach of writing one side then hedging if need be with the other is what I tried doing awhile back, however I could never get it right & ended up chasing & defending to no avail. Thought it might have been that I can't pick direction or my timming was off so I turned to putting on ICs as a whole then managing them as 2 seperate trades, this has served me alittle better. If the side you put on went against you relatively quickly, I figure neutralizing delta with the other side would do little to assist. What would you do in this scenario?

Otherwise I'll write a low probability IC (perhaps starting with an Iron Butterfly and add more IBs to morph to the IC) and delta hedge OFTEN as I go along. The thing with delta hedging short gamma is that you lock in losses, (the reverse of long gamma scalping), so I'd prefer to pay commissions than pay for delta.

I might start with, or add some double diagonals or calendars for the vega if necessary.

The end payoff can be substantially different to what I started with.

That's how I prefer to do it.

I read up on how Cottle likes to play it with the IBs, this has never really grabbed me, mainly due to the constant adjusting. Will look into again as i can see how it mitigaates loss whilst locking in profits.