Messing Around With Spread Ideas

Discussion in 'Options' started by longthewings, Dec 13, 2014.

  1. Greetings Fellow Traders,

    Kind of a slow, boring day for me and I'm playing around with scenario analysis on a spread I put on yesterday at the market close. The structure is essentially two combined backspreads (one in each direction). The wings are 1 SD out either way and the ratios are such that the initial position is vega and delta neutral.

    I've used this position before and found it to be pretty solid from a risk management perspective. However, the twist on the new version is that I've always put these on using expiries at least a month or more out. This new one is a weekly. While a more "conventional" approach would be to use this in order to trade swings in IV or capture a large spike in RV, I'm thinking that the weekly can be an interesting way to bet on terminal distribution. Basically, put on the spread, rebalance delta and vega as needed throughout the week, and try to lose as little as possible, holding out for a butterfly-like payoff. Of course, the twist is that should a large move occur in either direction, you could also potentially reap quite a windfall payday.

    I've backtested a few of these with decent results, and so I decided to try my first on NFLX. Just a small position here to see how it goes. The spread is:

    upload_2014-12-13_12-17-25.jpeg


    The spread was put on about 30 minutes before close on 12/12/14 when the stock was pinning in the vicinity of 335. The wings are wider than they should be; however, I didn't use the 322.5/347.5 strangle since I figured they'd probably be less liquid.

    Anyway, I'll rebalance vega and delta as needed and post the hedges as I execute them. Let's see how it turns out this week.

    Any thoughts are welcome.

    Thanks
     
  2. xandman

    xandman

    upload_2014-12-13_13-29-57.png
     
    Last edited: Dec 13, 2014
  3. Thanks. Looks like something is up with the delta figure though. Also, the model is misleading. Even if NFLX opened at 341 on Monday there's no way the spread would mark at that big of loss. Also, the projections of the center rising that quickly are not accurate either. If it were to just sit at 335, the p&l would still only be a couple hundred bucks even on Thursday.
     
  4. xandman

    xandman

    Oops. I modeled ALL of them as Puts.

    upload_2014-12-13_19-35-7.png upload_2014-12-13_19-36-14.png
     
  5. Cool. Thanks. Yeah that looks much better. Keep in mind though that the structure will evolve throughout the week as new options are bought and sold to hedge, the goal being to whittle down the max loss regions, leaving a high probability setup for a close within the profitable area on Friday. Either that or we need RV to explode come Monday. That would be sweet.
     
  6. I had hoped to update this in real time, but unfortunately due to more pressing matters I could not. Either way, here is a screenshot of the updated position along with all of the hedging thus far. I'm pleased with the performance, particularly given difficult trading conditions at times (market makers are going really wide often). Given the massive swings we've seen, the hedged position has held up and is currently only showing a small loss (down ~$180) whereas the original unhedged position would be marked closer to down $600.

    upload_2014-12-16_20-9-43.jpeg
     
  7. Note that the prices of the original position are slightly different. This is one I did in a different account, so the fills were at different prices. Executed around the same time last Friday though.
     
  8. Messy day today. Poor trading on my part. Lots of slippage.

    Hedges:

    upload_2014-12-17_17-47-53.jpeg

    While disappointing, the trade is still alive and I believe has a reasonable chance to be profitable. But it will be quite a bit of work tomorrow to clean this thing up going into Friday.
     
  9. Dolemite

    Dolemite

    This trade is called a wrangle I believe. There was a thread on here by Maverick that discussed this trade and some ideas on the setup. I don't believe he adjusted it however.
     
  10. Thanks. Yeah Baird's book was the only place I've seen the actual term "wrangle" used. Although Taleb devotes a couple of pages to two different forms of "fourth moment bets" in Dynamic Hedging. Obviously both those books were written before weekly options came about, so I'm basically interested in whether anyone has tried these on a weekly basis and had any success.
     
    Last edited by a moderator: Dec 18, 2014
    #10     Dec 17, 2014