Much obliged, this is probably the most in depth cooking recipe you've ever done. Still need help to decipher the jargon and the abbreviations, but there's a whole weekend ahead... And where are you heading? Oregon by any chance?
Got nowhere. Obviously more than I can chew. I went to google to find out about risk reversal, stickiness, etc. Funny that some links pointed to this forum. I had no clue stickiness is a valid notion, I thought it’s a term you coined. Anyway, I learned few things, but I’m still far from getting what you’re saying. What do you mean by targeting neutrality which is 10 SPX above the body strike? What do you call neutral strike? Is this related to the above? Then you said: The targeted body strike is trading 13.7%. You’re expecting the vol at the neutral strike to be 12.7% and perhaps 12.3% on the body. I assume targeted body strike means the strike where you’ll have 3 shorts at and you see its vol = 13.7% - correct? Then do I expect that to drop to 12.3%? Please explain. Bearish 132C fly neutral to 10 points under the body? A picture is worth a thousand words – I know I’m asking too much.
Des ... is the 132 skip strike fly you are suggesting similar to your 'pitchfork' with long wings ? Cheers James
@destriero Help a newb out. How does different vol regimes affect the structuring/viability of the BWBs? Say week before Xmas vol regime vs this last week? I'd imagine it's more difficult to isolate skew when strip vols are jumping around.
The PF is 4 legs of the vol-figure at the body strike (three short puts; one short call; same strike) so no, but both can be used for skew valuation. The PF is better for stressing and the 132 for actual structuring. The only caveat would be in the top deciles on implied and realized vols where the ATM PF will trade over the outside PF. In that case you'll need to run an ATM fly risk reversal for valuation and structuring.
Skew trades flat only in the top three deciles (not the bottom/low vol), so something like a PF will not register a "skew sale" but a 231/132 will be extremely cheap in terms pf premium. It's best to run a fly risk reversal to value strip and skew. ATM upside call 132, ATM downside put 231, premium valuation.