Controversial Option Discussion Of The Day - Calls and Puts

[wayneL]

I guess my point was to argue the myth that LR is always safer, not to use the comparison as a basis to pick UR over LR, so I agree with your last statement. Sharp as always

I remember back there was a blogger trading GOOG
Implied vol was ~ 70%
He could have shorted 1x atm straddle, but choose to short 20x IC's >1.5 sigma out. GOOG rallied and he lost much more than he would have with the naked combo due to the greater dgamma leverage in the IC [as Grinder points out].
Although the error was probably also related to the structure of the trade. He wanted to be short vol only, so choosing options that far otm was not optimal.

The leverage is the killer I guess .

Totally agree, and the GOOG thing is a great example.

The leverage thing is a point I've been trying to make around the blogosphere. It's not the strategy, it's the leverage.

People will quite happily enter a 100 share block of shares with immediate delta exposure ( +/- 100 deltas) without a worry in the world, but mention a 100 share + 2 x short option combo (synthetic short straddle with only the potential of +/- 100 deltas) and suddenly the option world starts tut tutting about all that unlimited risk. They prefer to see someone with 50 of those 1.5 sigma condors you mentioned with potential gamma/delta/vega measured in megatonnes.

It's totally illogical. Well meaning, but illogical.

 

[wayneL]

For example the VIX cash is about 23, the future about 25 currently.

The Aug 25 put is showing IV at 9% and should be about 50%.

Aug 25 call showing IV at 131% and should be 95%

Hi Derek

I'm not trying to nail your balls the the wall here, just trying to get to the facts for the benefit of all. I'm going to check those IVs when the market opens because what you are saying here still amounts to great gobs of free money.

If those figures are true I'm going to take on about a million conversions and retire rich.

Stay tuned.

 

[wayneL]

Hi Derek

I'm not trying to nail your balls the the wall here, just trying to get to the facts for the benefit of all. I'm going to check those IVs when the market opens because what you are saying here still amounts to great gobs of free money.

If those figures are true I'm going to take on about a million conversions and retire rich.

Stay tuned.

OK just ran through current August quotes through my model.

August futs = 26.6

Aug 25 call = 2.45 (approximate mid point of spread)
Aug 25 put = 1.15
Both come out close enough to 64% IV

Aug 27.50 call = 1.40
Aug 27.50 put = 2.60
Both come out close enough to 69% IV

Damn! No free money there.

 

[mazzatelli]

know what ya mean. Banked up on DDs waiting for the vega tsunami now. Sure enough it won't come, or at least won't come when I want it to.

This has been one monster rally, vols getting lower and lower.

 

[cutz]

know what ya mean. Banked up on DDs waiting for the vega tsunami now. Sure enough it won't come, or at least won't come when I want it to.

This has been one monster rally, vols getting lower and lower.

Are you guys also loading up anticapation of a vega explosion or playing it on a day to day basis.

 

[mazzatelli]

Are you guys also loading up anticapation of a vega explosion or playing it on a day to day basis.

Personally initiated some otm calendars late last week, hedging with spot.
Some BS trading/hedges has reduced the cost of calendars, so lying in wait now.

 

[Grinder]

Personally initiated some otm calendars late last week, hedging with spot.
Some BS trading/hedges has reduced the cost of calendars, so lying in wait now.

My DDs were put on a couple of weeks back in anticipation of a vega storm, now just working too darn hard keeping my ICs above water in this unidirectional BS market.

 

[Silus]

OK just ran through current August quotes through my model.

August futs = 26.6

Aug 25 call = 2.45 (approximate mid point of spread)
Aug 25 put = 1.15
Both come out close enough to 64% IV

Aug 27.50 call = 1.40
Aug 27.50 put = 2.60
Both come out close enough to 69% IV

Damn! No free money there.

Nicely done. Great %tages

 

[mazzatelli]

Damn! No free money there.

:birthday: 9,500 posts!!! :band:bier:

My DDs were put on a couple of weeks back in anticipation of a vega storm, now just working too darn hard keeping my ICs above water in this unidirectional BS market.

Good Luck with the IC's!!
ahhh DD's...those skitzophrenic spreads

There is talk of S&P hitting 1,000 before dropping like a brick
Back to scavenger mode methinks

 

[cutz]

There is talk of S&P hitting 1,000 before dropping like a brick
Back to scavenger mode me thinks

Geez,

I hope you right, all this negative theta is eating me alive.

Actually not that bad, just something I'm not accustomed to.

 

[mazzatelli]

Geez,

I hope you right, all this negative theta is eating me alive.

Actually not that bad, just something I'm not accustomed to.

I hope I'm wrong LOL, but remember last weeks topic, we can both be winners

Are you gamma scalping this straddle of yours?
Would be good to try earn theta daily, so that it remains solely a gamma/vega bet

 

[cutz]

Are you gamma scalping this straddle of yours?
Would be good to try earn theta daily, so that it remains solely a gamma/vega bet

No,

On top of my normal stuff, that index straddle is sort of a small live experiment of mine with futures. So it's a short SPI contract by 1 / long XJO sept calls by 5 ( XJO multiplier is 10 hence 5 contracts. ) can't really gamma scalp due to the size of SPI.

I'm actually long too much long vega by default due to leftover hedges on several positions and a fat finger episode on MQG yesterday which i'm in the process of unwinding for a profit if all goes according to plan, i could leave it on but i have trouble sleeping with to much time decay in my portfolio.

When i'm comfy with SPI i'll check out the Eurex products, multipliers of 10 and 10 on the futures and options, nicely matched.

BTW, that book just arrived, yeah you're right mazza heaps of math in it, it'll do my head in.

 

[Grinder]

A drop in the S&P can't come soon enough! My long calls are getting tired of doing all the heavy lifting for the ICs.

 

[wayneL]

:birthday: 9,500 posts!!! :band:bier:

LOL. I clearly talk too much.

 

[cutz]

A drop in the S&P can't come soon enough! My long calls are getting tired of doing all the heavy lifting for the ICs.

Geez,

Tell me about about it, first time experience with a one way market.

Some big time adjusting this week, that little SPI experiment has turned in the real deal, hopefully we get a reversal soon.

 

[mazzatelli]

There is talk of S&P hitting 1,000 before dropping like a brick
Back to scavenger mode methinks

Thy crystal ball is partially working

 

[wayneL]

I think we've all been adjusting a bit more than normal lately:

It's been a really good test of trader's delta hedging strategies. Pro-active rules IMO. Contest risk has been heavy, but certainly better than delta galloping away.

It also highlights the shortcomings of using standard deviations in selecting strikes. I've been using closer strikes lately, even atm and hedging more frequently.

Happy camper here.

 

[Grinder]

I think we've all been adjusting a bit more than normal lately:

It's been a really good test of trader's delta hedging strategies. Pro-active rules IMO. Contest risk has been heavy, but certainly better than delta galloping away.

It also highlights the shortcomings of using standard deviations in selecting strikes. I've been using closer strikes lately, even atm and hedging more frequently.

Happy camper here.

Not as happy as I'd like to be but pro- active as opposed to re-active is keeping me in the game. Stopped using SDs awhile back & just working of the greeks. Have also been bringing in the strikes for a better R/R.

 

[cutz]

LOL,

Looks like we've all been pretty busy lately, question i ask myself is whether to increase the downside bias to take advantage of any correction, problem is i'm normally incorrect trying to time the market.

Or maybe i should play it with the opposite bias of what i think i should be putting on.

 

[mazzatelli]

I wonder how Dan Sheridan students are doing?
If I recall correctly short strikes with a delta of < 10 were advocated

Low index vol has kept me out of wingspreads for past 3 weeks
I can remember pre-Oct 08 index vols at around 25-30% was considered rich premium

I've only got some cheap put calendars in the event of correction
Feeling neutral atm LOL